Bill Jamieson: Bank somersaults but there’s no strategy

Mark Carneys 'forward guidance' policy is all but extinct. Photograph: Kirsty Wigglesworth/Getty
Mark Carneys 'forward guidance' policy is all but extinct. Photograph: Kirsty Wigglesworth/Getty
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As if the events of 2016 were not tumultuous enough, the final weeks of the year look set to spring even more surprises. How will the world react to the outcome of the most fiery and bitterly contested American presidential election in living memory? And here in the UK, will the latest twist to the Brexit story lead to an early general election? Indeed, might Brexit even happen at all in any form that Leave voters would recognise?

Amid this relentless series of convulsions, little wonder that in seeking to work out what the implications are for the economy, inflation and interest rates, we turn to the central bank for guidance. And guidance has duly been given. But look in vain for a plan.

Last Thursday, the Bank of England made a series of forecasts on the future direction of three critical variables: the course of inflation, the course of the economy and, as far as it was able, interest rates.

These forecasts indicate a marked change from what the Bank and governor Mark Carney were signalling barely a few weeks ago. Indeed, the changes have all the characteristics of a somersault. The economy is now reckoned to be growing much faster than previously thought, while inflation is now set to climb well above the central banks’s 2 per cent target rate.

Now, for all the disconcerting scale of change, most would go along with the latest assessments. They certainly reflect the impact of major developments such as the sharp fall in sterling in recent months and the data that has emerged on how key components of the economy have been faring.

Businesses and households are already seeing the effects of the weaker exchange rate on the prices of goods and services. At the same time there is relief that employment has continued to grow and that the UK growth rate has been markedly more resilient than many feared just a few months ago.

But doubts inevitably arise. And they are less to do with the arithmetic of the latest forecasts than the volatility of the assumptions on which they are based. The word “uncertainty” barely begins to cover it. Carney says “we have the right policies for our times”. But no-one can be sure how long the current times will prevail.

This is evident in the forecasts for inflation and for growth. For example, Carney has raised his estimate of economic growth for this year by 0.2 per cent to 2.2 per cent. For next year he has raised it from 0.8 per cent just three months ago to 1.4 per cent now – a huge U-turn by Bank of England standards.

And don’t take this upward revision as the start of a sustained trend. The 2018 growth projection has been cut to 1.5 per cent from 1.8 per cent, and the 2019 projection to 1.6 per cent from 2.1 per cent. Indeed, the downgrade is so substantial that at the end of 2018, the Bank believes the economy will be on aggregate more than 2.5 per cent smaller than expected before the Brexit referendum vote.

The immediate implication of the upgrades is that they have removed the possibility of a further interest rate cut, which is why the Monetary Policy Committee has held rates at 0.25 per cent. Inflation meanwhile is forecast to increase to 2.7 per cent next year and in 2018, breaching the Bank’s 2 per cent inflation target. Inflation has already risen above expectations in September to 1 per cent.

Explaining the raised growth forecasts for this year and next, he said that, since the vote to leave the EU, household spending had held up better than expected. “For households, the signs of an economic slowdown are notable by their absence.” But he warned that households would see “very modest” growth in their incomes over the coming years.

As for future policy, Carney said: “We do not have a bias in the direction or what the next move will be.” But he clearly wants to keep his options open as he “can envision scenarios where they go either way”.

He is not the only one now at the mercy of events, and with an anxious desire to keep options open. Chancellor Philip Hammond has rowed back from earlier statements suggesting a big fiscal stimulus in his Autumn Statement on 23 November. He is said to have told cabinet colleagues to expect only a modest stimulus, with a programme of new infrastructure spending expected to run to the low billions of pounds a year. While banishing former rigid targets on the budget deficit, the aim is to ensure he has as much flexibility as possible to meet any Brexit-related headwinds in the future, and unleash a greater stimulus package if the current rate of economic growth starts to falter.

Judging by the chaos that has descended on the government’s Brexit timetable, he is going to need maximum headroom. According to a Treasury spokesman: “The Chancellor made it clear we face an unprecedented level of uncertainty.”

In Scotland the policy guidance is no clearer. A report by Jeremy Peat, visiting professor of the International Public Policy Institute, and Owen Kelly, former chief of Scottish Financial Enterprise for Holyrood’s economy committee, had little of hard substance to offer. “There is no clarity,” it declared, “as to what Brexit will mean for the UK nor how this will play out… A great deal has already been written and said about the possible impact of Brexit on the UK financial services sector, but it is clear that most of this is, inevitably, conjecture. We do not know what Brexit will mean, nor when it will actually come to pass… The vacuum of knowledge on which proposals can be based has led to only very generalised commentary and discussion.”

A bank of fog engulfs us, and it became even more impenetrable last week with the Law Lords’ judgment in the Brexit case. In all this, as with the Bank of England governor, “forward guidance” is as good as dead. High uncertainty is the new strategy. In truth, there is no plan.