Bank of England forecasts move more than credibility demands

The Bank is still underestimating the strength of the recovery - and its latest report, puzzlingly, contained large changes to its expectations for both unemployment and inflation.

Regular readers of this blog will know that I’ve always had a theoretical problem with forward guidance. Telling people that rates are going to stay lower for longer can have two undesirable consequences, ironically of a diametrically opposed nature. On the one hand, some people will think that if the Bank of England has such a downbeat assessment of the economy and its prospects, then they had better put off that purchase or that investment which they were planning. At the other end of the spectrum, some people will borrow far more than they should, because they believe the rate guidance, and we all know what will happen if the guidance is "wrong" and interest rates go up much sooner and faster.

But, I hear you say, surely the Bank of England has the finest brains at its disposal and its forecasts will therefore be rather accurate. Mmm, well no, not usually. In fact hardly ever, if their performance with regard to inflation forecasting is anything to go by. Mark Carney’s predecessor, Sir Mervyn King, was forced to write no fewer than 14 explanatory letters to Chancellors, starting with Gordon Brown in 2007, explaining why inflation had risen above 3 per cent, when the Bank’s target was 2 per cent. Now that refers to actual inflation outcomes, rather than forecasts, but forecasts presumably play a significant role in helping the Bank achieve its objectives, as monetary policy must usually, by definition, be set with a medium-term perspective.

The Bank’s latest Inflation Report contained really very large changes to its expectations for both unemployment and inflation. Let’s compare this report to the previous one, released in August. At that time the median prediction was that unemployment would still be 7.3 per cent in Q32015, but in the November Report, "The Committee’s latest projections, assuming that Bank Rate rises in line with the market curve, imply around a two-in-five chance that the unemployment rate will havereached the 7 per cent policy threshold (for rate rises) by the end of 2014. The corresponding figures for the end of 2015 and 2016 are around three in five and two in three respectively." This represented a shift forward in time of nine months for the time at which we might reach the 7 per cent threshold.

There is also a key phrase in that quote on which one should focus: "assuming that Bank Rate rises in line with the market curve". So, even this new optimism is based on an expectation that rates will rise above 0.5 per cent before then, as predicted by the market’s interest rate curve, but in a recent speech (in Nottingham) Carney told us that the only thing that effected the economy was the overnight rate and that it certainly wasn’t going to rise until unemployment was down to 7 per cent, so surely even this revised forecast of when we might reach the threshold is still actually pessimistic?

In the real world Carney may feel that forward guidance, and its initial implied assurance that rates were going to stay low for a long time, has managed to retain some of its credibility because the Bank also had to dramatically lower its forecasts for the near-term path for inflation-which it now projects will be 0.7 per cent lower in Q42013 than it did just in August. It also lowered from 42 per cent to 33 per cent its view of the probability that CPI will be above the 2.5 per cent "knockout" in 18-24 months time.

All-in-all, I retain my suspicion that forward guidance is a flawed policy. The Bank is still underestimating the strength of the recovery and I have even greater fears for its credibility in the light of these rapid and sizeable changes to its forecasts.

Mark Carney said recently that the only thing affecting the economy was the overnight rate. Photograph: Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

Getty
Show Hide image

25 times people used Brexit to attack Muslims since the EU referendum

Some voters appear more interested in expelling Muslims than EU red tape.

In theory, voting for Brexit because you were worried about immigration has nothing to do with Islamophobia. It’s about migrant workers from Eastern Europe undercutting wages. Or worries about border controls. Or the housing crisis. 

The reports collected by an anti-Muslim attack monitor tell a different story. 

Every week, the researchers at Tell Mama receive roughly 40-50 reports of Islamophobic incidences.

But after the EU referendum, they recorded 30 such incidents in three days alone. And many were directly related to Brexit. 

Founder Fiyaz Mughal said there had been a cluster of hate crimes since the vote:

“The Brexit vote seems to have given courage to some with deeply prejudicial and bigoted views that they can air them and target them at predominantly Muslim women and visibly different settled communities.”

Politicians have appeared concerned. On Monday, as MPs grappled with the aftermath of the referendum, the Prime Minister David Cameron stated “loud and clear” that: “Just because we are leaving the European Union, it will not make us a less tolerant, less diverse nation.”

But condemning single racist incidents is easier than taking a political position that appeases the majority and protects the minority at the same time. 

As the incidents recorded make clear, the aggressors made direct links between their vote and the racial abuse they were now publicly shouting.

The way they told it, they had voted for Muslims to “leave”. 
 
Chair of Tell Mama and former Labour Justice and Communities Minister, Shahid Malik, said:

“With the backdrop of the Brexit vote and the spike in racist incidents that seems to be emerging, the government should be under no illusions, things could quickly become
extremely unpleasant for Britain’s minorities.

“So today more than ever, we need our government, our political parties and of course our media to act with the utmost responsibility and help steer us towards a post-Brexit Britain where xenophobia and hatred are utterly rejected.”

Here are the 25 events that were recorded between 24 and 27 June that directly related to Brexit. Please be aware that some of the language is offensive:

  1. A Welsh Muslim councillor was told to pack her bags and leave.
  2. A man in a petrol station shouted: "You're an Arabic c**t, you're a terrorist" at an Arab driver and stated he “voted them out”. 
  3. A Barnsley man was told to leave and that the aggressor’s parents had voted for people like him to be kicked out.
  4. A woman witnessed a man making victory signs at families at a school where a majority of students are Muslim.
  5. A man shouted, “you f**king Muslim, f**king EU out,” to a woman in Kingston, London. 
  6. An Indian man was called “p**i c**t in a suit” and told to “leave”.
  7. Men circled a Muslim woman in Birmingham and shouted: “Get out - we voted Leave.”
  8. A British Asian mother and her two children were told: "Today is the day we get rid of the likes of you!" by a man who then spat at her. 
  9. A man tweeted that his 13-year-old brother received chants of “bye, bye, you’re going home”.
  10. A van driver chanted “out, out, out”, at a Muslim woman in Broxley, Luton
  11. Muslims in Nottingham were abused in the street with chants of: “Leave Europe. Kick out the Muslims.”
  12. A Muslim woman at King’s Cross, London, had “BREXIT” yelled in her face.
  13. A man in London called a South Asian woman “foreigner” and commented about UKIP.
  14. A man shouted “p**i” and “leave now” at individuals in a London street.
  15. A taxi driver in the West Midlands told a woman his reason for voting Leave was to “get rid of people like you”.
  16. An Indian cyclist was verbally abused and told to “leave now”. 
  17. A man on a bike swore at a Muslim family and muttered something about voting.
  18. In Newport, a Muslim family who had not experienced any trouble before had their front door kicked in.
  19. A South Asian woman in Manchester was told to “speak clearly” and then told “Brexit”. 
  20. A Sikh doctor was told by a patient: “Shouldn’t you be on a plane back to Pakistan? We voted you out.”
  21. An abusive tweet read: “Thousands of raped little White girls by Muslims mean nothing to Z….#Brexit”.
  22. A group of men abused a South Asian man by calling him a “p**i c**t” and telling him to go home after Brexit.
  23. A man shouted at a taxi driver in Derby: "Brexit, you p**i.”
  24. Two men shouted at a Muslim woman walking towards a mosque “muzzies out” and “we voted for you being out.”
  25. A journalist was called a “p**i” in racial abuse apparently linked to Brexit.