Economic forecasters are used to ridicule. Their role is to confer respectability on astrologers, quipped John Kenneth Galbraith. But the Bank of England’s forecasting failures are no joke. On Tuesday, strong wage data pushed gilt yields above the mini-Budget levels of last autumn.
Two-year yields rose 0.23 percentage points to 4.86 per cent. They peaked at 4.64 per cent after unfunded tax cuts in September last year. Then, Liz Truss’s government took the blame. This time round, it is the Old Lady and its lugubrious governor Andrew Bailey who need to take cover.
The BoE’s struggle to control inflation is partly a consequence of its failure to predict its rise and persistence. In its defence, it is in good company. Its big forecasting flops partly reflect a reliance on futures to predict energy prices.
Other flaws are less defensible. Its forecasting model was based on an era when there were no shocks to energy and food prices. The Monetary Policy Committee’s decision to stop following that model is welcome.
Some of the bank’s most egregious errors have been avoided by private sector forecasters, says Simon French of Panmure Gordon. The BoE’s forecasts are based on announced government policy, however implausible. Everyone else can use their common sense.
Last August, the BoE assumed that energy prices would be capped at an unrealistically high £3,500. Many private sector forecasters bet on government intervention. The BoE’s failure to keep pace with record-high immigration figures could also have been mitigated.
The BoE’s miscalculations are a problem for credulous investors. Some fled the UK unnecessarily last November when the BoE warned that the country risked plunging into the worst recession since the second world war.
Big domestic fund managers with the savvy to discount the BoE’s forecasts have had — and continue to have — a home advantage.
Until recently, the BoE’s record during its 25 years of independence was strong. But the deference its forecasters show to government policies creates an impression of political subservience. Unless the BoE does better, investors will discount its estimates more heavily, alongside gilt prices.