The Bank abandons a lot of hope

Mervyn King, merchant of gloom

A gloomy message from the Bank of England today, but no gloomier, perhaps, than we have come to expect.

Britain's central bank revised up its short-term inflation forecasts today and revised down its expectations for growth. That's been the story of nearly all the Inflation Report press conferences I have been to in the past few years.

We also had gloomy words from the Governor Mervyn King about the challenges facing the UK and broader global economy. But that's not exactly new, either.

What is new is that the Bank now thinks that the UK economy will not get back to where it was at the start of 2008 until well into 2015. This time last year, it thought we would have recovered out lost output by the second half of next year. Two years ago, it thought we would get there at the end of 2011.

The Bank hasn't just lowered its growth forecasts for the next year or so - it has more or less given up hope of being pleasantly surprised.

Chopped off

This chart shows what I mean:

Bank of England chart showing projected probabilities of GDP growth in 2013 Q4

I know, it's not pretty. But it's quite telling.

In essence, it shows how likely the Bank thinks it is that the UK will achieve various growth rates by the end of 2013. The taller the bar, the more likely it thinks that annual growth rate will be.

The grey line shows what the chart looked like in August. Back then the range of possible outcomes was quite widely spread: in effect, the Bank thought that anything could happen, including something very good.

The economy was just as likely to be growing by more than 3.5% at the end of 2013 as it was to be shrinking or broadly flat.

Now look at where the distribution of possibilities lies today - you'll notice most of the rosy scenarios have been chopped off.

In effect, the Bank now thinks that that kind of rapid bounce back in the economy is all but inconceivable. Its best guess is we will grow modestly - but if we're surprised, it's unlikely to be a happy one.

If you're the kind of person who thinks it is "always darkest before the dawn" you might think all of this a reason to buck up. Historically, the moment when absolutely everyone has resigned themselves to continued slump is usually the time when the economy takes off.

Nerdy journalists

But the journalists who came to the Bank this morning weren't interested in such musing. They were interested in the chancellor's decision to take hold of the big pile of interest payments sitting in the Bank as a result of its policy of quantitative easing.

I went into this fiendish topic in my last post. Suffice to say the governor does NOT think the Treasury move has compromised the MPC's capacity to set monetary policy.

Nor do officials think there is any risk that the Bank of England will be taken to court for illegally helping the government to finance its deficit.

It was all, said the governor, a "fuss about nothing".

Perhaps, but the FT's Chris Giles did confirm one clear implication of last week's policy change. It has made it hard to answer the following simple question: how much money has the Bank created by quantitative easing?

Is it the £375bn the MPC has officially voted to create since 2009? Or is it closer to £410bn - £375bn plus approximately £35bn of the Bank's money which the Treasury will spend over the next 10 months as a result of the policy change, which the MPC chose not to offset and the governor agrees will have the same effect as more QE?

It's a puzzle. But in practice, I suspect the MPC will continue to refer to the £375bn figure, leaving nerdy journalists to add the footnotes (sigh).

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 26.

    "Power giant SSE's profits up 38%
    SSE, the gas and electricity supplier which increased bills by 9% last month, sees half-year profits rise 38.3% despite "challenging" market conditions."

    A challenging Market?
    It's a cartel! You can't lose.

    Note; we do not have access to these 'low interest rates', we have to use the middle men that do have access to these low interest rates = rip off

  • rate this

    Comment number 129.

    Do we really need to do a full weeks work? I mean if progress means anything surely we should be working less, not more! It used to be one bread winner per household, more or less, now it's two, and the kids are shuffled off to a child minder. We're referred to as consumers, we used to be citizens. Seems progress now means consuming more, so working more to afford it! I think we've lost the plot.

  • rate this

    Comment number 22.

    It's pretty clear no-one understands how to run a successful economy, least of those paid substantially to do so and those paid to commentate on it. Eh, Steph?

    Not that I'm about to suggest a solution. However, in Science (my area) when your models fail to make reliable predictions you ask yourself whether you really understand what you're looking at.

    But economists are experts, aren't they?

  • rate this

    Comment number 146.

    no wonder theres no growth.

    we live in a world were huge companies pay no tax , were wages are so low they have to be topped up with tax paid by those who cant afford it cos their wages are so low,banks wont lend money that was given to them by the same low paid tax one has money to start buisness or expand and no one has the money to spend on the products if they did

  • rate this

    Comment number 32.

    Growth is finished. Thats the story of the global economy. The rich west is feeling it first as our economies are far more susceptible but generally overall, were reaching a tipping point.

    Our economy is based on ideas that go against the laws of physics. You cannot get more out of a closed system than you can put in. These laws cannot be broken. Our future will be the result of trying.


Comments 5 of 469



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