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.

Newsgroup Newspapers Ltd/Published with permission
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Everything that is wonderful about The Sun’s HMS Global Britain Brexit boat

And all who sail in her.

Just when you’d suffered a storm called Doris, spotted a sad Ukip man striding around the Potteries in top-to-toe tweed, watched 60 hours of drama about the Queen being a Queen and thought Britain couldn’t get any more Brexity, The Sun on Sunday has launched a boat called HMS Global Britain.


Photo: Newsgroup Newspapers Ltd/Photos published with permission from The Sun

Taking its name from one of Theresa May’s more optimistic characterisations of the UK post-Europe (it’s better than “Red, white and blue Brexit”, your mole grants), this poor abused vessel is being used by the weekend tabloid to host a gaggle of Brexiteers captained by Michael Gove – and a six-foot placard bearing the terms of Article 50.

Destination? Bloody Brussels, of course!

“Cheering MPs boarded HMS Global Britain at Westminster before waving off our message on a 200-mile voyage to the heart of the EU,” explains the paper. “Our crew started the journey at Westminster Pier to drive home the clear message: ‘It’s full steam ahead for Brexit.’”

Your mole finds this a wonderful spectacle. Here are the best bits:

Captain Michael Gove’s rise to power

The pinnacle of success in Brexit Britain is to go from being a potential Prime Minister to breaking a bottle of champagne against the side of a boat with a fake name for a publicity stunt about the policy you would have been enacting if you’d made it to Downing Street. Forget the experts! This is taking back control!


 

“God bless her, and all who sail in her,” he barks, smashing the bottle as a nation shudders.

The fake name

Though apparently photoshopped out of some of the stills, HMS Global Britain’s real name is clear in The Sun’s footage of the launch. It is actually called The Edwardian, its name painted proudly in neat, white lettering on its hull. Sullied by the plasticky motorway pub sign reading “HMS Global Britain” hanging limply from its deck railings. Poor The Edwardian. Living in London and working a job that involves a lot of travel, it probably voted Remain. It probably joined the Lib Dems following the Article 50 vote. It doesn’t want this shit.

The poses

All the poses in this picture are excellent. Tory MP Julian Brazier’s dead-eyed wave, the Demon Headmaster on his holidays. Former education minister Tim Loughton wearing an admiral’s hat and toting a telescope, like he dreamed of as a little boy. Tory MP Andrea Jenkyns’ Tim Henman fist of regret. Labour MP Kate Hoey’s cheeky grin belied by her desperately grasping, steadying hand. Former Culture Secretary John Whittingdale’s jolly black power salute. And failed Prime Ministerial candidate Michael Gove – a child needing a wee who has proudly found the perfect receptacle.

The metaphor

In a way, this is the perfect representation of Brexit. Ramshackle, contrived authenticity, unclear purpose, and universally white. But your mole isn’t sure this was the message intended by its sailors… the idea of a Global Britain may well be sunk.

I'm a mole, innit.