Wednesday, November 14, 2012
Bank throws in the towel
Posted by David Smith at 07:00 PM
Category: Thoughts and responses

I wasn't at the Bank of England's Inflation Report press conference, but most of the good lines appear to have been contained in Sir Mervyn King's opening statement. All the Bank's earlier optimism about recovery appears to have evaporated - it now takes the view we are stuck in a low growth era. The following is a textual analysis of the main points in that opening statement.

"Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed – indeed output may shrink a little this quarter. It is difficult to discern the underlying picture. It is probably neither as good as the zigs suggest nor as bad as the zags imply. Despite a resilient labour market– as we saw again in today’s figures – the economy has barely grown over the past two years."

Which means: The economy's still flat and I'm not going to get caught out again if GDP falls in the fourth quarter.

"That unexpected weakness reflects the impact of the euro area crisis and its effect on confidence and bank funding costs, and the sharp squeeze on real incomes from higher than expected world energy and food prices. As some of these headwinds abate – as they look set to do – a slow recovery is in prospect, supported by a fall in bank funding costs brought about in part by the Funding for Lending Scheme."

Which means: I wasn't wrong to back George Osborne's fiscal tightening - the weakness is due to other factors - and we're doing our best (belatedly) to get credit growing again.

"GDP growth is more likely to be below than above its historical average rate over the entire forecast period. The subdued recovery reflects a judgement that the global environment will remain unfavourable. In addition, the Committee believes that the effective supply capacity of the economy is likely to continue to grow slowly over the forecast period."

Which means: The economy's damaged and it is going to stay damaged. Even if we could get growth going, the supply-side's been badly weakened.

"Inflation is likely to remain above target for the first part of the forecast period, and is higher than in August, reflecting recent outturns and the announcement of large increases in household energy prices. Further declines in inflation are being checked by price increases in sectors where market influences are weak – the rise in student tuition fees alone added over 0.3 percentage points to yesterday’s inflation figure, and domestic gas and electricity prices are rising faster than wholesale energy prices. Such factors are pushing up inflation by over 1 percentage point a year, and the rate of inflation in those sectors influenced more by market pressures would have to be unusually low for inflation overall to be close to the 2% target. Nevertheless, the Committee judges that inflation is likely to fall back in the second half of
next year, as the impact of short-term pressures wears off and slack bears down on pay growth. Towards the second half of the forecast period, the risks to inflation are broadly balanced around the target."

Which means: Damn, we've got it wrong on inflation again, but it isn't our fault. We won't see 2% inflation again on my watch.

"For a country like the United Kingdom attempting to rebalance her economy such an outlook poses real challenges. If that unfavourable world environment persists – and there is little sign of any change to the underlying problems in the euro area – it may be unreasonable to expect anything other than a slow and protracted recovery absent a further fall in the real exchange rate. In such an environment, there are limits to the ability of domestic policy to stimulate
private sector demand as the economy adjusts to a new equilibrium. But the Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases."

Which means: Despite the absence of any evidence that sterling's 2007-8 fall did any good, I'd like to see another fall in the exchange rate. And all this QE we've been doing hasn't been a waste of time and money - honest.

The inflation report is here.