The British establishment is excessively secretive, and the Bank of England is part of that establishment. I have for too many years (e.g. pdf, para 105) argued that central banks should publish their forecast for the interest rate they set. Unsurprisingly the innovative New Zealand Fed did it first, followed by the ever rational Swedes and Norwegians, and then of course the US Fed itself. I really did hope that at this point the Bank of England’s line that the naive British public would not understand the difference between a forecast and a commitment would buckle, but no, the Bank continued to base its forecasts for everything on the market’s forecast for interest rates, rather than their own. Even wise ex-MPC members continued to suggest all this openness elsewhere would end in tears.
Things began to change with Canadian Mark Carney’s arrival as governor. In my view there were two things the forward guidance he introduced last August was trying to achieve. The first was to clarify what the MPC’s objectives were. In particular, they were not (or at least were no longer) trying to target two year ahead inflation regardless of what was expected for output or unemployment. The second aim was to give a clear indication that the MPC (or at least the governor) did not think rates were going to rise anytime soon. This is important, because it either gives us additional information about the Bank’s forecasts or their objectives.
Now many in the press have made great play about the fact that the Bank got its forecast for unemployment wrong, and that therefore the August guidance lasted only 6 months. I love the way journalists can at the same time write that macroeconomic forecasts are ‘notoriously’ unreliable (even though it is a well known and acknowledged fact), and at the same time think that the headline ‘Bank makes forecasting mistake’ is somehow news. But Carney was not providing a forecast for unemployment because he thought that forecast was going to be particularly good, but because he wanted to convey his currentview about when interest rates were likely to rise. As his view has not changed, then he is quite justified in claiming that the August guidance was worth doing.
What we had yesterday was not really a new version of forward guidance, but rather another stage in making public the information the Bank is basing its thinking on, and a further nudge towards publishing an interest rate forecast. We have (pdf) “When Bank Rate does begin to rise, the appropriate path so as to eliminate slack over the next two to three years and keep inflation close to the target is expected to be gradual.” So you can think of that as a kind of average of the individual committee member forecasts that the Fed publishes, in non-numerical form! We also now know much more (pdf) about the forecast behind this judgement.
As this post from Tony Yates makes clear, this must be very frustrating for those who were or still are inside the Bank and had been arguing for more openness for many years, but before Carney to no avail. Chris Giles makesthe point very clearly. Yet, as Tony says, Carney has not swept away all the cobwebs yet. You still have the silly position of the Bank publishing a forecast which is entirely their own work apart from one key variable - interest rates (where they use market forecasts) - which they actually set!
There was plenty more of interest in the inflation report. One was the Bank’s view about what economists call the natural real interest rate in the medium term, which they think is going to remain low compared to historic levels. It’s partly for this reason that they do not think nominal interest rates are going to rise very quickly. In other words, they are part converts to the secular stagnation idea. Their large upward revision to expected growth was good news, but their rather low (and until now fairly secret!) estimate of the output gap was not. It was interesting that Carney described the UK recovery so far as “neither balanced nor sustainable”.
The really big news on the UK economy, floods apart, continues to be the stagnation of productivity growth, which is partly why the Bank got its forecast of unemployment wrong. However we have recently had some good news on that front from another bank. At least amongst workers at Barclays Bank productivity grows apace. How do I know this? Because their bonuses continue to increase, even though profits are down. And as at least one comment on my earlier post on executive pay said, the 1% are just getting paid more because they are getting more productive.
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