Monetary policymaking at the Bank of England in uncertain times

Monetary policymaking in the face of uncertainty

Uncertainty has long been a feature of the monetary policy landscape.

It has been long-recognised that uncertainty is an ever-present challenge in monetary policymaking (Greenspan (2003)). This is not a challenge unique to monetary policy, uncertainty is endemic in many other public policy areas as well (Kay and King (2020) and Spiegelhalter (2024)). Monetary policy makers face uncertainty about the data, about the nature and persistence of shocks, and about the structure of the economy. The level and type of uncertainty that is most relevant for monetary policy will fluctuate over time as economic conditions vary.

Uncertainty has risen in recent years, driven in part by unprecedented shocks.

The MPC was granted independence for UK monetary policy in 1997. The initial decade after independence happened to coincide with a period of relatively limited uncertainty (Bailey (2025)). This was the so-called ‘NICE’ era (or ‘Non-Inflationary and Consistently Expansionary’ (King (2003)). Inflationary shocks were small, supply growth was stable and fluctuations in output were almost entirely the result of relatively small shocks to aggregate demand (Carney (2020)).

Uncertainty has increased since the global financial crisis in 2008 and the economic environment has turned from ‘NICE’ to ‘NAsTY’ (‘Not-As-Tranquil Years’; Broadbent (2024)). The UK has faced a series of unprecedented shocks, with particularly uncertain effects. Many of these have been global in nature. This includes the global financial crisis, material changes to the UK’s trading arrangements following the referendum on the UK’s membership of the European Union, the Covid-19 pandemic and Russia’s invasion of Ukraine.

Many of these shocks have had significant implications for aggregate supply, as well as aggregate demand. Some have driven very large increases in inflation and presented challenges for the MPC around the appropriate speed at which to bring inflation back to target (Chart 1).

This has come against a backdrop of significant structural change.

Assessing the state of aggregate supply has become more difficult as the UK economy has continued to experience significant structural change. These changes include many years of very low productivity growth, shifts in the geopolitical environment, and demographic changes. And there is clear scope for rapid and far-reaching technological change in the future driven by artificial intelligence (AI), creating the potential for further supply side transformation via technology and labour markets. All of these phenomena contribute to uncertainty around the supply side of the economy, which makes assessing inflationary pressures more difficult.

The instability in the economy is likely to remain in the future.

The world is likely to remain unstable in the future, as it has been in the recent past. Heightened uncertainty, new and unusual disturbances and structural change are unlikely to abate. This instability is likely to continue to present challenges to monetary policymaking in the future.

Challenges for monetary policy

Clarity and stability of the institutional framework and objectives for monetary policy are particularly important during times of uncertainty.

The Bank of England has a primary objective for price stability. Key elements of the institutional framework for monetary policy – such as operational independence over monetary policy, an annual remit letter from the Chancellor of the Exchequer, and decision making by the MPC – are set out in primary legislation. The Chancellor specifies the definition of price stability in the annual remit letter. The MPC sets monetary policy to meet the 2% inflation target and does so in a way that helps to sustain growth and employment. Price stability supports investment, spending and hiring decisions. This in turn supports the innovation and dynamism that drives productivity growth and improvements in living standards.

The institutional framework has proven resilient in the face of recent unprecedented shocks. The clarity of the framework is particularly important in anchoring inflation expectations during times of uncertainty (Pill (2025)).

But a more unstable environment makes monetary policymaking more challenging.

Monetary policymaking has become much more challenging against a backdrop of higher uncertainty, unprecedented shocks and structural change. A separate staff paper (Haberis et al (2025)) examines the implications of uncertainty for monetary policymaking in more detail, drawing on theory to assess ways in which uncertainty can be factored into monetary policymaking in practice.

There is no mechanical link between any particular form of analysis and monetary policy.

In a stylised hypothetical world a single central projection for inflation could be used mechanically to formulate and communicate monetary policy. In that world, monetary policy makers would have to be certain that demand shocks were the only driver of the outlook and know with certainty how those demand shocks and the impacts of policy would play out. This is illustrated in a stylised form in Panel A of Figure 1 (below, and for further discussion refer to Haldane (1998)). But the challenges posed by higher uncertainty and a more volatile economy emphasise the limitations of a stylised mechanical approach to monetary policy like this one. And while a central projection will often be an important input into monetary policymaking, there has never been a direct link between a central projection and monetary policymaking (Bean and Jenkinson (2001)).

It would be risky to rely on any single perspective in monetary policymaking.

It is important not to place too much emphasis on any single perspective or type of input in making monetary policy. Relying on a single analytical framework, a single model or a single projection carries risk, and these risks are much greater in an unstable environment. For example, any particular approach might not capture important aspects about how the economy is working at that point in time – particularly if there is elevated uncertainty or the economy is going through a period of structural change. So, conclusions drawn on the basis of any single perspective could give misleading steers on the right way to set policy. This also underlines the importance of a flexible policy process that is not anchored around a single perspective – or a single central projection.

Changes to the Bank’s monetary policy process

In response to the changing economic environment, the Bank is changing the way it makes monetary policy.

The Bank is making important changes in response to the recommendations in the Bernanke Review into the Bank’s forecasting and related processes during times of significant uncertainty (Lombardelli (2024)). To enable the changes to the policy approach outlined in this article, significant investments in the Bank’s modelling capacity and data infrastructure are being undertaken.

The MPC will draw on a wider range of perspectives and inputs.

The MPC will routinely draw on a wider range of perspectives and inputs in monetary policymaking. It has already begun to do this. This means a range of models, diverse data sources, and analysis that sheds light on specific policy-relevant mechanisms in the economy. These inputs are and will continue to be drawn from multiple models, techniques and approaches – to reduce the reliance on any single way of thinking and encourage challenge. The next section elaborates on the types of inputs that are useful to the MPC.

The MPC’s policy approach will be flexible and adapt to the economic environment.

We are building greater flexibility into the MPC’s policy approach. The analytical inputs it considers, and the emphasis it places on them, will continue to vary over time. For example, in an environment where relatively few small and familiar demand shocks are prominent drivers of the outlook for inflation, the MPC would likely place more emphasis on a central projection in its deliberations. However, in an environment where uncertainty is high or new and unusual disturbances occur – like shifts in the geopolitical landscape, for example – the MPC would put more emphasis on a wider range of inputs. In a more unstable environment, it might in turn place more emphasis on the evolution of the data rather than a projection.

The MPC is set up to draw on a range of expert views to provide careful judgement when interpreting the wider range of inputs.

Expert judgement will always be required to fill the gap between individual analytical inputs and the implications for policy. Judgement is inherently subjective and difficult to evaluate in real time. The institutional framework and the structure of the MPC is designed to be robust to this through drawing on the insights and knowledge of nine members with diverse experiences and expertise. MPC members are held to account individually and explain the judgement that has influenced their policy actions externally. The MPC is in turn supported by expert staff with a range of highly relevant skills and experiences.

The Bank’s monetary policy approach and communications will continue to evolve within this new structure over time.

The Bank’s new approach to monetary policy is illustrated in stylised form in Panel B of Figure 1. This approach will continue to evolve over time, including to incorporate the new and improved modelling capacity and data infrastructure that the Bank is building.

The Bank will absorb new ideas, encourage debate and invite challenge. Recent steps to enhance the openness of monetary policymaking at the Bank include extensive academic and central bank engagement, a new Macro Technical Paper (MTP) series and an international conference on transforming monetary policy, which informed the changes set out in this article.

The Bank will also continue to learn from practice in other countries and wider disciplines. The approach will adapt to take into account a wider range of analytical inputs as the Bank’s capabilities improve, and it will also adapt to lessons learned from the changes over time.

Inputs into monetary policymaking

The Bank will continue to widen the range of inputs into monetary policy.

The MPC has always considered a range of analytical inputs as part of its policymaking but the Bank has recently taken steps to make the policy approach more flexible and widen the range of inputs that are presented by staff (for recent examples of MPC members highlight the role of diverse inputs read Greene (2025), Mann (2025) and Pill (2025)). The Bank is significantly expanding its modelling capacity and data infrastructure that will allow the MPC to widen further the range of analysis it considers.

Table A outlines the types of analytical inputs that the MPC will routinely consider as part of its policy deliberations. This includes sources like various forms of data, case studies, empirical and macroeconomic models and insights from academic research, including the efforts of Bank researchers. It also includes inputs that can be used to translate insights more directly into policy implications, which is the process of combining inputs together through the application of expert judgement.

The Bank will expand its toolkit to include richer assessments of risk, uncertainty and analysis of alternative policy approaches.

Richer assessments of risk and uncertainty are an important area of expansion in the Bank’s analytical toolkit. The Bernanke Review pointed to scenario analysis as a particularly useful input and there are a number of ways they will be used in policymaking (read Box A for further details).

The MPC will explore policy analysis facilitated by Bank staff’s simulation exercises (Alati et al (2025)). These simulation exercises draw on simple policy rules that are broadly illustrative of past monetary policy decisions, and so-called optimal policy projections. These tools are used to simulate alternative policy approaches and the associated economic outcomes. They show how alternative policy approaches affect the economic outcomes that can be achieved by policymakers and can assess how a given approach performs in alternative scenarios. This helps policymakers consider the merits of alternative monetary policy approaches and the nature of any trade-off between the speed at which inflation is returned to target and stabilising output (Carney (2017)).

As with any other input, there is no mechanical link between policy simulations and real-world monetary policy decisions. And these tools are stylised and simplified. So, they do not accurately reflect the MPC’s real-world reaction function.

The Bank will expand the use of data science techniques and AI in its monetary policymaking.

The Bank already makes regular use of big data to inform monetary policy decisions, drawing on household and firm-level survey and administrative data, regulatory submissions, and high-frequency economic indicators. AI tools are increasingly embedded in analytical workflows, including techniques adapted for econometric analysis (Anesti et al (2021) and Buckmann and Potjagailo (2025)). The Bank is also expanding its use of natural language processing and analysis of text data.

Looking ahead, the Bank’s analytical capabilities will be significantly enhanced by the rollout of the Enterprise Data Platform (EDP) – a cloud-based, integrated data and analytics ecosystem. The EDP will support scalable machine learning and AI use cases, enable secure and decentralised access to structured and unstructured data, and provide modern tooling for data scientists, analysts, and policymakers. While web scraping is already used for some data collection, the EDP will allow for more sophisticated integration of diverse data sources to generate insights into the economy and policy.

Changes to the MPC’s communications

We are adapting the MPC’s communications so that they better reflect the wide range of inputs that are informing monetary policy.

Ultimately, monetary policy makers need to reach a policy decision, explain that to the public, and be accountable for it. Public understanding of the monetary policy objective and the policy decisions intended to achieve it is at the core of the MPC’s ability to deliver price stability. The MPC uses layered communications to explain its policy decision to different audiences and will continue to do so. The MPC’s communications package is summarised in Figure 2.

We will be updating the content of the quarterly Monetary Policy Report so that it is more flexible and covers the wider range of perspectives and inputs considered by the MPC in their deliberations. This will include wider analysis covering issues most relevant to the monetary policy decision, as well as a section on risks containing scenarios where appropriate.

The Report will continue to contain a central projection for the UK economy, one that the majority of the MPC agrees is a reasonable baseline (Bailey (2025)). For now, we will continue to provide fan charts, based on historical forecast errors, depicting uncertainty around the central projections for inflation, GDP and unemployment. But MPC judgements about the balance of risks will be communicated through qualitative statements, rather than judgemental adjustments to the fan charts. Bank staff will continue to investigate the most effective ways of communicating uncertainty to different audiences.

A new Monetary Policy Overview will set out how the analytical inputs have informed the MPC’s collective policy decision. This will sit alongside the existing Monetary Policy Summary – a short explanation of the MPC’s collective policy decision.

Because MPC members are individually accountable for their policy decisions, and debate among members enhances the robustness of policy decisions, monetary policy communications must balance a clear articulation of the collective policy decision with detail on individual members’ views and the main areas of debate.

Individual MPC members have always explained their views in speeches. From November 2025, we will provide such information on the day of the policy decision. In addition to a record of MPC discussions, the Minutes will contain space for each member to explain their own policy views.

These changes should ensure that the MPC’s communications better reflect the wider range of inputs that are informing policy and that they adapt as the importance of those inputs varies.