Why did the economist bring a crystal ball to work?

Because even though they’re always predicting, they figured they might as well use a tool that’s just as accurate!!!

Bit tongue in cheek, but also unfortunately true. The economists and the so-called experts at the Bank of England have a shocking performance when it comes to predictions and forecasting. I can forgive them for forecasting out years in advance and when major shocks come along, but they cannot even predict a few weeks out now, and at a time when there needs to be a clear strategy.

You would think that the Bank of England would have world class forecasting tools and models because a lot of what they have to do involves making judgements about the future. So, it was incredible to hear Huw Pill, the Bank of England’s chief economist, say its forecasting model had become ‘unworkable’ and that it had produced misleading forecasts. He told a European Central Bank forum that the Bank used a model ‘based on last quarter century’.

Time to Review the Model?

MPs have called upon the Bank of England to investigate the models it uses, and the Bank of England has now announced it has launched a broad review of how it makes and uses economic forecasts. It says it will review ‘its forecasting and related processes during times of significant uncertainty’. Surely the only time the model really needs to be accurate is when there is ‘significant uncertainty’. I’m sure we could all forecast numbers when all the data points are moving in the right direction. Something tells me that their model might be an abacus and a chalk board! They appear to be stuck in the dark ages. Maybe if the people at the Bank of England were on performance-based pay, we might see a better quality of forecasting and indeed decisions.

Interest Rates Rises Not Working

On top of the modelling fiasco, the Bank of England recently put-up interest rates by a further 0.5% to 5%, and it would appear that it will likely go up again too. Like many, I struggle with the rationale to keep putting interest rates up when it is not working to reduce inflation. I totally understand that in the past this has worked, and it is one of very few tools that the Bank of England has, but just because it is your only major tool, doesn’t mean you should keep using it.

In the past putting up interest rates impacted virtually every mortgage holder straight away, with the aim to stop consumers spending as much, with the ultimate aim of bringing down inflation. Understand that rationale but things are different now. For a start inflation is not being caused by everyone spending too much. Secondly the mortgage market has changed. 85% of consumer mortgages are on fixed rates these days, not variable rates, and so until those fixes come off, the increase in base/mortgage rate does not impact. As the fixed rate terms end of course it does then impact, but this all takes quite some time, and indeed many months. Therefore, increasing base rates now has a much longer lag than would have been seen previously. However, this will disproportionately impact those on variable rates and those coming off a fix rate.

So, it is all very well increasing the base rate month after month, but it will take time to have the desired effect, and if you don’t give it time to bed in then it causes other issues in the meantime. Higher base rates will impact the housing market, increase the cost of debt for businesses and ultimately lead to businesses failing and job losses. It actually could have the opposite impact of what they are trying to do by pushing up some prices and inflation with these actions because businesses will raise prices to cover their increased costs and employees will seek higher wages to cover the increased cost of living.

The bank’s forecasts (for what they are worth of course) show that the forward indicators already suggest inflation will fall rapidly over the year ahead without further action. However, because of their current actions they will actually overshoot and push inflation below the target of 2% and this will be at a time of weak economic growth and less businesses investment due to the bank’s current actions, and we could end up with stagflation instead!!

Therefore, I have concluded that the Bank of England in its current format and personnel is just not fit for purpose anymore, and hence you’re fired!! Taxi for the Bank of England……..