Bank of England QE move was a mistake: Simon Ward

The chief economist said the Bank had “once again” overestimated disinflationary forces on the UK economy and that he did not believe that inflation was on track to undershoot its 2 per cent target.

He said members of the Bank’s Monetary Policy Committee (MPC) should effectively quit if their 2 per cent inflation prediction proves to be incorrect.

“The Bank’s inflation forecasts have been persistently much too optimistic since the middle of the last decade, with no evidence that this bias is lessening, despite expenditure of £2.8m on upgrading its economic models,” he said.

Mr Ward said the Bank’s reasoning for increasing the QE asset purchasing programme by £50bn earlier today were not actually likely to occur.

“The Bank’s forecast of a headline CPI rate of below 2 per cent by late 2012 depends on a slowdown in core inflation and / or significant weakness in energy and food prices that drags headline below core. Neither seems probable,” he said.

“Core inflation failed to ratchet lower in the wake of the 2008-09 ‘great recession’ so is unlikely to show much response to recent more limited economic weakness.

“Food should have a favourable impact but energy and other industrial commodities tend to correlate with emerging-world economic growth, which is now reviving.”

The economist said Henderson’s core scenario was that inflation would bottom out at 2.5 per cent in the autumn and then rise towards the end of the year.

Looking to 2013, Mr Ward said it was likely that inflation would rise, reflecting global pressures and a lagged effect from the Bank’s past QE programmes.

Earlier this year, in an interview with the Guardian, dovish MPC member Adam Posen promised not to seek reappointment if his forecast that inflation will fall below 2 per cenr by the middle of 2012 proved wrong, on the grounds that such an outcome would invalidate his analytical framework.

Mr Ward said: “The rest of the MPC should follow Dr Posen’s lead and commit to making way for new membership in the event of a continued overshoot, both in recognition that this would demonstrate the need for new forecasting approaches and to uphold the principle that bankers should bear the consequences of failure – even central bank policy-makers.”