The Bank abandons a lot of hope

Mervyn King, merchant of gloom Image copyright Reuters

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:

Image copyright Bank of England

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).