Bank of England is Michael Fish of forecasters after inflation miss

Treasury minister defends Truss pointing to Germany's inflation

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If the BoE was a weather forecaster it would have a worse reputation than Michael Fish, because of its lousy track record in forecasting major financial storms. Now it risks doubling down on its mistake over inflation.

I’m not the first to compare the BoE to weather forecaster Michael Fish, who famously claimed the UK would avoid a devastating hurricane that went on to wreck large parts of southern England in 1987.

It was made by Bank’s then chief economist Andy Haldane in 2017, who called its failure to predict the 2008 financial crisis the profession’s “Michael Fish moment” .

Haldane said a series of forecasting errors before and after the financial crash had brought the BoE’s reputation into question.

As well as failing to foresee the 2008 financial crash, the BoE also misjudged the impact of the Brexit vote.

Haldane blamed the failure of narrow economic models to cope with “irrational behaviour” in the modern era, and said economic forecasters must adapt to regain the trust of the public and politicians.

Well they haven’t.

Last year the BoE rejected a growing army of analysts and commentators (including me) who warned that inflation was about to rocket.

Covid supply chain issues and trillions of fiscal and monetary stimulus had already set a fire under prices, even before Vladimir Putin’s crazed invasion of Ukraine caused an energy shock.

Yet Bank of England Governor Andrew Bailey refused to tighten policy, claiming inflationary pressures were “transitory”.

There is nothing transitory about the storms ravaging the UK right now. They risk doing lasting damage.

Now there is a growing danger that the BoE will try to atone for its earlier mistake by increasing interest rates too quickly this autumn.

Bailey wasn’t the only one to dismiss the return of inflation as a passing phenomenon.

Almost every other major central banker did, too, led by Jay Powell, chair of the mighty US Federal Reserve.

Our monetary lords and masters succumbed to a dangerous piece of groupthink, and we are all paying the price.

Inflation is now 9.9 percent in the UK, and the Bank predicts it will hit 11 percent in October. The BoE’s monetary policy committee (MPC) is expected to increase base rates by a massive 1.25 percent in on November 3 to curb prices and save the pound.

That will lift bank rate to 3.50 percent, hammering mortgage borrowers and the wider economy.

Interest rates hikes are a blunt instrument that will do nothing to curb inflation, which is being driven by Covid aftershocks, Putin and energy shortages.

Bailey has nothing in his armoury to tackle those. All he is doing is crushing the housing market, and driving us into recession.

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Bailey is in a tight spot, as he covers for Chancellor Kwasi Kwarteng’s disastrous mini-Budget.

The two are at odds, with Kwarteng embarking on a dash for growth, while Bailey slams his foot on the brakes.

My fear is that the BoE is pressing too hard, with base rates on course to hit six percent next year.

That could trigger a deeper recession than is required to put the lid on inflation.

Bailey is not the only one in danger of overdoing the tightening, the Fed is hiking rates even more aggressively.

It has been pushing through repeated rate rises of 0.75 per cent and quantitative tightening (QT) of a brutal $95billion a month.

The world is now careering towards recession as the strong dollar squeezes everyone. That could put a swifter end to inflation than Bailey or Powell expect.

At least Michael Fish ‘fessed up to his error and as Haldane pointed out, meteorological forecasting improved markedly as a result.

I wish I could be as confident that the Bank of England had also learned the error of its ways.

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