The Bank of England has begun the biggest “root-and-branch” reforms to the way it makes and communicates rate-setting policy in almost 30 years.

Bank deputy governor Clare Lombardelli said these “substantial” changes “will be the largest reform since the Bank was granted operational independence for monetary policy in 1997”.

Lombardelli set out the reforms in a speech to a Bank of England Watchers Conference in London this morning.

The move follows the Ben Bernanke review in April, which was commissioned after the Bank failed to predict inflation would hit a four-decade high of 11.1% in 2022, sparked by energy price rises and post-pandemic supply chain shocks.

This drew heavy criticism from politicians and independent economists.

At the time the former US Federal Reserve chair said the economic software used by the Bank had “serious deficiencies” and that the rate-setting Monetary Policy Committee should include “alternative scenarios” in its forecasts.

This morning, Lombardelli, who will oversee this process, said the Bank would change:

• Its data infrastructure and our modelling framework
• The inputs into policymaking, including “the role of the forecast and scenarios, and their underlying assumptions”
• The way MPC discussions are structured
• How data is used to inform the MPC’s policy decisions
• How the Bank communicates its “monetary policy decisions, outlook and risks to both financial markets and the general public”

Lombardelli said that the Bank “will widen and rebalance” its forecasting our approach, “placing less focus on a central projection”.

She added: “We will build the use of scenarios into our processes. We will loosen the link between the forecast and the policy decision and its communication.”

She pointed out: “A wider and more systematic use of scenarios will allow us to better consider alternative conditioning assumptions and also different relationships between economic variables.

“Combined with data analysis it will help us judge the likelihood of different views of the economy, and to update our judgements on risks and uncertainties over time as the evidence evolves.”

The deputy governor said the Bank will radically update the models it uses, admitting that it had “slipped behind frontier” systems used by other institutions.

She said: “We will develop and draw on a wider range of models that capture the different uncertainties that we want to explore.”

Lombardelli added: “So, we are investing in our modelling toolkit: reviewing, updating and expanding our existing suite of models. This is a multi-year project and we are still designing our modelling strategy.”

The policymaker also said that “clear communication is a key part of ensuring trust in what we do,” and admitted “that there are better ways to convey uncertainty” than the fan charts which have accompanied MPC minutes.

She added: “Scenarios will help us here, they will enable us to provide narratives about how the economy may differ from the baseline projection, why, and what that would mean.”

But the deputy governor pointed out: “Substantive changes to our external communications will take time.”

She said: “We are taking a root-and-branch approach. One imperative is that staff and policymakers can quickly access the right data and understand their lineage and quality, and to this end, we are upgrading our metadata and data management models.

“This is painstaking work – we have around three million data series to migrate – but essential to lay the foundations for the analytical technology that sits on top of it.”

Bernanke report in April set out a total of 12 recommendations for the Bank, which the Bank accepted.

Lombardelli said the Bank would host a conference next summer “to explore some of the interconnected issues around scenarios, modelling and communication” for “experts, academics, watchers, market participants”.