Bank of England governor Andrew Bailey and chief wonk Huw Pill admit they botched inflation forecasts
Top officials at the Bank of England today admitted they have undershot the strength of inflation, with governor Andrew Bailey confessing the central bank has some “very big” lessons to learn over how it sets interest rates.
MPs on the influential treasury select committee slammed members of the monetary policy committee (MPC) for failing to accurately foresee the sustained upward inflation march.
In its latest set of forecasts published earlier this month, the Bank lifted its end of year inflation projection to 5.2 per cent, up from the 3.9 per cent predicted in February. It lifted most of its inflation projection across its just over three year forecast period.
Critics have questioned how the Bank is able to set optimum interest rates without being able to understand where the rate of price increases is headed.
Figures out tomorrow are tipped to show inflation slipped to 8.2 per cent in April from 10.1 per cent, sparking a slow descent that won’t bring the rate of price increases back to the Bank’s two per cent target until 2025.
The International Monetary Fund in new forecasts for the UK economy today said interest rates may have to “stay higher for longer” should inflation hang around.
Threadneedle Street’s chief economist Huw Pill – who ignited outrage recently with misplaced comments asking Brits to accept they are poorer – admitted the MPC’s inflation projections have persistently “been too low”.
“We are trying to understand why we have made those errors, interpret those errors in terms of the behaviour, and make an assessment in terms of how it will continue,” Pill, a former Goldman Sachs banker, added.
Governor Bailey said the Bank needs to examine how it sets interest rates in a more uncertain economic environment.
“I think there are some very big lessons in how we operate monetary policy in the face of very big shocks. Because the shocks that we have faced have been unprecedented,” he told the cross party select committee.
“I think there are big lessons about how we operate policy in that world – in a world of very big uncertainty,” he added.
It is thought that inflation in the UK across advanced economies was initially boosted by a sudden burst in demand after pandemic restrictions were lifted. That upsurge in spending strained weakened global supply chains, pushing up prices.
Russia’s full-scale invasion of Ukraine in February 2022 turbocharged international energy prices, raising headline inflation numbers in the UK, US and Europe.
Rates reached levels not seen in four decades, which central bankers say has made it much more challenging to accurately forecast exactly where inflation is travelling.
Britain’s inflation number peaked in October at 11.1 per cent. It had been steadily falling until March’s shock rise to 10.1 per cent.
Most of inflation’s stickiness since the turn of the year has been engineered by a shock upsurge in food prices, which accelerated at their fastest since the 1970s over the last year, up around a fifth.
Bailey blamed that rise on a mixture of grain exports being squeezed by the Russia-Ukraine war, rare weather events hurting harvests and food producers rebuilding profit margins.
“Our agents do pick up a story about margins. It is a story about rebuilding [profit[ margins that were squeezed, particularly last year,” he said.