Bank of England plans to win World Cup

Bank of England

The Bank of England's assessment of the health of the UK economy has not changed in any fundamental way over the past three months.

The Governor, Mark Carney, said the economy was only just beginning to get back to normal. And he then employed a perhaps unfortunate analogy with the looming World Cup, which was that the Bank's priority was to steer the economy through the opening rounds, all the way to victory.


The auguries are, however, better than those for Roy Hodgson's crew.

It expects inflation to remain at or below the 2% target for up to three years, and growth in GDP or economic output this year of 3.4% (which is more optimistic than most forecasters, but is what it has been expecting for some months)

And the Bank is a little more optimistic about the pace at which unemployment will continue to fall, from 6.8% in the first three months of the year (as announced today): the Bank now expects unemployment to be 5.9% in the first three months of 2017, down from its previous prediction of 6.3%.

That benign outcome would be the consequence of a less benign one: the Bank of England has become a little less optimistic about the rate at which the UK's lacklustre productivity will recover.

There are two reasons why this expected delay in output per hours worked, or the efficiency of the economy, is potentially a bit of a pain.

It would postpone the widely longed-for recovery in living standards (pay rises are not inflationary when we are rewarded for working more efficiently).

And a worsening profile of productivity rises should in theory mean that there is less spare capacity or slack in the economy, which in turn would move the economy nearer to the moment when UK growth would become inflationary - and therefore closer to the moment when interest rates would need to rise.

But the Bank says that the decelerated recovery in productivity is not material, and that its estimate of the outstanding slack in the economy has not narrowed by very much (it estimates this slack as equivalent to between 1% and 1.5% of GDP, or economic output).

Also the 10% rise in the value of the pound over the past year has subdued inflationary pressures (because the price of imports falls).

Houses The Bank has signalled unease at the rate of new mortgage lending

So, as I have mentioned, inflation does not look a scary prospect.

That in turn begs a resonant question: if the Bank expects to meet its mandated inflation target over the next two to three years, why do investors expect interest rates to start rising in the first quarter of next year?

Is the market wrong to anticipate an increase in the Bank's policy rate early in 2015 (it wouldn't be the first time)?

That is the implication certainly of the Bank's latest forecasts, since they are based on rates rising in the second quarter of 2015.

As for the UK's national obsession, house prices, the Bank signals unease that new mortgage lending is redolent of a bubble and potential financial instability - in that it says that "new lending at high loan to income ratios has surpassed pre-crisis levels, particularly for high-value properties, including those in London".

In other words, worryingly large numbers of people are taking out mortgages that are equivalent to a record multiple of their respective incomes.

When I asked the governor about how he would deal with this incipient bubble, he said in the first instance that would be an issue for the new Financial Policy Committee, which has a range of powers to rein in banks' ability to make riskier loans.

He was therefore signalling that the increase in house prices does not necessitate a rise in interest rates - so as and when a rise in interest rates does come, it will initially be prompted by concerns of general over-heating in the economy (which does not appear an imminent danger) rather than narrower over-heating in the housing market.

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 164.

    That the UK seems to be recovering is positive, but Carney's caution is well-placed.

    Economics: UK GDP is only reaching pre-crash level now. If trend growth since 2008 is discounted, its still some 2.5% compounded over five & a half years c14% behind where it would have been!

    Politics: government is desperately seeking a feel good factor. Economically Help to Buy should end, but politically...

  • rate this

    Comment number 163.

    A polity that feels itself 'recovered' with just 1-in-15 adult citizens unemployed, with most of the rest in poverty or fear of poverty, dependent on 'in-work benefits' or contracts with no security, such a polity is by itself doomed, to under-performance at best, to atomised alienation & conflict, and to such aggravated cyclicity as to ensure periodic cataclysm, economic, military, environmental.

  • rate this

    Comment number 162.

    Kristin Forbes , the new MPC member just announced, lists among her hobbies.."Hiking". This is good news as the current MPC has forgotten how to do that!

  • rate this

    Comment number 161.

    @ 159.fallingTP

    No worries.

    Have a great day.

  • rate this

    Comment number 160.

    153.dungolfin - seems about right to me.

  • rate this

    Comment number 159.

    158. Congratulations. What a wodner youa re. I bet you are really pleased with yourdelf.

    Me I have several kids, wish I had more and don't care a jot for your Apocalypse myth. But please keep preaching that old time religion. I find it highly amusing.

  • rate this

    Comment number 158.

    @ 146.fallingTP
    @ 148.Geoff Berry

    Yup, done my bit.
    No children and inherited one. And you ?
    Housed several families without pay, reward or recompense. And you ?

    Oh, perhaps I should add, everything works fine.

    Oh, and what kind of extreme weather events are you hoping for ?

    Have a nice day and keep on trashing this planet.

  • rate this

    Comment number 157.

    Let the pensioners pay until their savings are worthless! Reward the bankers and the moneylenders.

  • rate this

    Comment number 156.

    The problem with the UK's economy is that a lot of the recently employed are employed out of desperation and low-pay self employment and combing this with the UK's real estate bubble (it never actually crashed in '08 unlike the US which explains why the US is doing a lot better as it just sucked it up) is going to end badly unlesss internevention but overpriced property is a vote winnder sadly.

  • rate this

    Comment number 155.

    We continue to have a big national accounting hole. Houses contribute to GDP but not to inflation.

    Hence governments (around the world from right and left) tend to inflate housing bubbles before elections.

    Central banks are powerless as they're mandate only includes controlling inflation. Before they could be painkillers after the booms busted but this time interest rates are near zero so...

  • rate this

    Comment number 154.

    Problem is that one of (many) causes of 2007-09 crash was the appalling savings level of UK popn & relatively high inflation. Prior to crash, interest rates were relatively low in UK which also had effect of increasing low liquidity in the banks.

    Low interest rates are not helping our recovery & may lead to a paralysis where no-one dares increase them because of 'what might happen'.

  • rate this

    Comment number 153.

    We are not fooled anymore. We know that this is all guesswork, well paid guesswork but ultimately real finger in the air stuff. Economic figures are up so lets predict modest continued growth until such times as that growth weakens then predict a modest slowdown. Prepare a 'No one could have predicted...' statement just in case

  • rate this

    Comment number 152.

    So many people on here complain about the 'poor interest rate' their dreadful banks give them.

    I agree, BUT stop complaining, stop looking for the 'easy/safe' return and go and make your money work for you. Savings rates are likely to be low for a while so go and invest in something else.

    Or do you prefer to just moan about it?

  • rate this

    Comment number 151.

    This bloke (or whoever wrote his lines) has the right approach to the crooked speculators
    Interesting post, MTW.

    Do you know the reason why the money lenders were there and why Jesus cleared them out of the Court of the Gentiles?

  • rate this

    Comment number 150.

    “Securing the recovery is like making it through the qualifying rounds of the World Cup. That is an achievement, but not the ultimate goal,”
    “The real tournament is just beginning, and its prize is a strong, sustained and balanced expansion. Across the bank, we are setting policy in order to help win that prize for the good of the people of the United Kingdom.”
    Only London and SE qualify.

  • rate this

    Comment number 149.

    'we're not as good as we think we are, we need to go out and prove that'
    'it's the expected start to this game, nil-nil'
    'it was as clear as night is day'
    'the economy's recovering, the housing market bubble won't damage this and interest rate rises aren't the only macroprudential tool'
    not Colemanballs at all....

  • rate this

    Comment number 148.


    Does your cave let in water and spoil your curds and wey ?

  • rate this

    Comment number 147.

    Growth prediction of 3.4% and inflation of less than two percent - OK but what has this got to do with Osborne's austerity programme? Unemployment still predicted at high level in 2017 and average wages increases (excluding bonuses) still well below inflation which means most people are still becoming worse off. Allowable wage increases productivity is one factor but so are profits and dividends.

  • rate this

    Comment number 146.

    143. Yes pity about all those people. I assume that you are doing you bit to save the world by doing away with your car, your computer and have had your electrics disconnetced? A return to a pre-industrial age is certainly called for. I trust you will lead the way?

  • rate this

    Comment number 145.

    housing market 6 manufacturing economy 1

    should have gone to that 'well-known optical manufacturer' ref , when you allowed that own goal of 'Help to Sell' into the back of the net.
    too many penalties awarded against Manufacturing.
    Ref definitely biased towards Housing Market.
    A game of two halves,with no spare cash after the mortgage or rent to support retail hot dogs and beer at halftime!


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