Proportion of actual and expected interest rate changes occurring in Inflation Report  (A) Actual changes Percentage of interest rate changes 100 90 80 70 60 50 40 one-third 30 20 10 0 1997-2000 2001-present whole period IR months Not IR months  (B) Expected changes Percentage of interest rate changes 100 90 80 70 60 50 40 one-third 30 20 10 0 1997-2000 2001-present whole period IR months Not IR months  What – if anything – should be read into the MPCs apparent change in behaviour? On the face of it, the evidence might suggest that the re-evaluation of the outlook undertaken during the quarterly forecast has become more influential. But there are a number of possible explanations. Most obviously, it could be a reflection of the shocks that have come along in the last 4 years. These may have required fewer changes in the policy rate than in the pre-2001 period. Alternatively, the required adjustments in rates might have been bigger in the early days, and if the MPC had an inclination to change rates in small steps, perhaps because it had good reasons for proceeding cautiously, then larger desired adjustments might have required more frequent changes: of the 16 changes in the first period, 7 were back-to-back, while in the second period, only 4 out of the 14 changes happened in consecutive meetings. The turnover in the Committee’s membership since 2000 might provide a different kind of explanation.
And that counts, both when it comes to organising the debate between nine experts, and when it comes to explaining the basis of policy to a non expert public. But forecasts are highly fallible, so our forecast centred approach to inflation targeting has gone hand in hand with a determined effort to illustrate the wide range of uncertainties around any central projection and a systematic attempt to factor the Committee’s own judgements about the risks into decision taking. That, for me, is a key reason for resisting recent calls by the IMF and others for the Bank to ‘publish numerical projections for a broader range of key variables’. Detail is seductive – but it can also be highly misleading, and a committee that spent its time debating the details of the forecast rather than using it as a tool to address big picture issues would be at risk of losing its way. Forecasts are indispensable – but they should be handled with care. 10  BIS Review 17/2005  Table 2. Interest rate surprises  A. Are rates changes evenly spread over the months of the year? Rate changes IR months non-IR months Whole period 1997-2000 2001-present  15 6 9  14 10 4  B. Are rates changes expected to be spread evenly over the months of the year?