Carney Faces Fresh Forecast Headache in Revamped Policy Report
The central bank will overhaul its quarterly economic forecasts, known as the Inflation Report for more than two decades.
(Bloomberg) --
The Bank of England’s Monetary Policy Report this week will unveil more than just a new name for its predictions.
The central bank will overhaul its quarterly economic forecasts, known as the Inflation Report for more than two decades. The change, effective from the Nov. 7 decision, coincides with a meeting where officials will have to update the assumptions those predictions are based on, thanks to the Brexit extension to January.
The latest political developments, which now include an election in December, mean the last three months of Governor Mark Carney’s tenure will be dominated by the Brexit uncertainty that’s dogged the BOE since 2016. The central bank, which will probably cut its growth and inflation forecasts on Thursday, will have to avoid getting dragged yet again into the divisive political battle surrounding the issue.
Carney will hold a press conference on Thursday in London to explain the interest-rate decision and the new report. Also in the background is the question of who succeeds him. No decision is expected until after the election, and there’s been a frenzy of speculation about who could get the job.
The BOE’s August forecasts took for granted the Conservative government’s ultimately unsuccessful policy of leaving the European Union with a deal and transition period on Oct. 31. With Brexit pushed back until Jan. 31, a new model is required, while the job of officials been complicated further by the Dec. 12 vote.
In such situations, the convention is to compile forecasts based on the incumbent government’s policy, so one option would be simply to roll forward their assumption to the new exit date.
Entrenched Uncertainty
That would also mean factoring the government’s policy of ending the transition period at the end of 2020 -- a gap which most observers think is too short to secure a new trading agreement with the European Union. That raises the prospect of a less-than-smooth transition, and boosts the chances of an exit that leaves the U.K. trading on terms set by the World Trade Organization.
Even before the latest delay, policy makers were already flagging the risk of entrenched uncertainty for the economy, and therefore may want to find a way of reflecting this in forecasts. That could mean a far gloomier outlook, and the majority of economists surveyed by Bloomberg last week predicted the BOE would lower estimates for growth and inflation in 2020 and 2021, while increasing its forecast for unemployment.
The latest update comes a time when officials have been split over their reaction to a deal, with some explicitly laying out their reaction function. One, Gertjan Vlieghe, who has long been an advocate for more transparency, went the furthest, laying out three possible Brexit scenarios and his likely response to each.
A final complication is that the forecasts are a result of a series of meetings, a number of which would have taken place before the U.K.’s Brexit delay was confirmed.
Still, the revamped report provides them with an opportunity to explore issues like uncertainty further, with a new “In Focus” section, which the BOE says will describe “the issues that have received particular consideration in the latest forecast, with a view to making the report more thematic.”
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Andrew Atkinson
©2019 Bloomberg L.P.