BoE Back in Brexit Spotlight after Growth Rethink

The Bank of England is feeling the heat again after its new, more upbeat picture for Britain’s economy put an uncomfortable focus back on its warning last year about a quick and sharp Brexit vote hit to growth.

Governor Mark Carney woke up on Friday to headlines in anti-European Union newspapers that accused him of leading the Bank into a U-turn. “More humble pie for Bank as economy keeps growing,” the Daily Express said.

The BoE surprised investors on Thursday when it hiked its forecast for growth this year to 2.0 percent. That was up from a call of 1.4 percent made just three months ago and represented a leap from its first post-referendum forecast of 0.8 percent.

The new prediction was higher than all but one of 50 forecasts by private economists in a Reuters poll in January, raising some eyebrows in the City of London. The BoE also edged up its growth forecasts for the following two years.

At the same time, Carney and his fellow policymakers lowered their forecasts for inflation over the next three years, potentially making it easier for them not to put Britain’s economy to the test of higher interest rates any time soon.

Asked by a reporter on Thursday whether he was nervous that the BoE’s new projections – which influence investments in financial markets and spending decisions by businesses – might turn out to be wayward like its ones in August, Carney said things were different now.

“Last summer we were in pretty exceptional circumstances,” he said.

A string of surveys in the weeks after the referendum showed a collapse in confidence among consumers and companies in July and persuaded the BoE that a slump was coming.

In fact, confidence bounced back almost immediately and Britain’s economy barely flinched after the referendum.

Yet Carney was unrepentant about the BoE’s decision to cut interest rates to a new record low and ramp up its bond-buying program in August, action that he credited for some of the strong performance of the economy since then.

“The committee took the judgment which in retrospect was correct,” he said. “We still have the same policy stance so it’s hard to sit here and say, well, we shouldn’t have done that.”

The BoE’s new view on the economy rests in part on factors that would have been hard to call in August, chiefly the victory of Donald Trump in the U.S. presidential elections, which some believe could boost the world economy, and the British government’s relaxation of its austerity targets late last year.

DISMAL SCIENCE

Central bankers are no strangers to criticism for failing to predict how their economies will perform.

The U.S. Federal Reserve, like the BoE, failed to see how slow the economic recovery would be after the financial crisis. The European Central Bank raised interest rates in 2011 to head off a rise in inflation only to reverse the decision quickly later that year as the euro zone crisis deepened.

The BoE’s chief economist Andy Haldane said last month that it was a “fair cop” to say that the central bank had misread the initial impact of the Brexit vote although he still believed it would weigh on the economy over the long term.

In fairness, many of the world’s biggest banks were further off the mark than the BoE with their calls for the Brexit impact on the economy. Most economists who took part in a Reuters poll in August said Britain was heading into a recession while the BoE predicted the economy would still grow, albeit barely.

One lesson for the BoE might be to rely less on surveys of consumers and businesses – which gave the false signals of a slump last July – and more on how momentum in economic growth may withstand political shocks better than widely thought.

BoE Deputy Governor Ben Broadbent said the Bank was due to discuss the links between survey indicators and future growth as part of an annual assessment of its forecasting work in May.

But he conceded that alterations to its models was unlikely to endow the Bank with infallibility.

“Unfortunately we didn’t need only the experience of the second half of last year to tell us that forecasting is a hazardous business, when you have done it as long as we have,” Broadbent told reporters on Thursday.

Reuters

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