The Bank has binned gloomy post-referendum growth projections and now admits it may have to hike interest rates after all. Let’s be frank, this is hardly the first time the Bank of England has got something wrong. It missed the financial crisis, it misjudged the strength of the housing market in the run-up to it, it underestimated the inflationary surge in 2008 and overestimated the economy’s capacity to recover from the Great Recession. But rarely has the Bank ever got an economic forecast quite as wrong as this one. In fact, one can go one step further: this is the biggest forecast u-turn in its history as an independent central bank.
Think about it.
In August, its first forecast after the referendum vote, the Bank slashed its gross domestic product projections more than in any single Inflation Report on record. Today, it raised its GDP forecast more than in any single Inflation Report on record. It is, of course, a deep embarrassment. Having cut interest rates to the lowest level in history and pledged to cut them again, the Bank has now had to admit that it no longer has plans to cut them. In fact, with inflation now forecast to rise further above its 2% target than at any point in recent history (that tends to happen when the pound falls) it has had to signal that it may have to raise rates if prices continue rising.
Very awkward indeed.
And yet, the story is not quite as straightforward as those headline revisions might suggest. For one thing, that near-term upgrade is followed by a big growth downgrade in the following years. The upshot is that actually in three years’ time the economy is set to be a few percentage points smaller than the Bank forecast last time around. That raises a deeper issue about the economics of Brexit: the real damage (or indeed boost) will be determined by the way the negotiations go in the coming years, and by the nature of the deal the UK eventually secures.
Will it be a deal that keeps the borders open and trade flowing? Will it clamp down on commerce and freedom of movement? These are the things that will determine economic growth and productivity in the coming years. It is too early to make a decent stab at predicting any of that – though the Bank’s medium term forecast cut suggests it believes the process might dampen growth in the coming years. Will it be right on that? As the former Governor, Mervyn King, used to say, the one thing we can be sure of is that none of our forecasts will be completely accurate.
Ed Conway Economics Editor