Bank of England governor Mark Carney has defended the accuracy of the central bank’s predictions for the economy.
The UK economy has avoided recession since the country voted to leave the EU on June 23 2016, confounding the predictions of many.
The Bank of England cut UK interest rates to a record low level of 0.25 per cent in the days following the referendum result, an action that would be expected to stimulate economic activity.
Rates were then lifted back to the pre-referendum level of 0.5 per cent in November 2017, as inflation rose above 3 per cent.
The Bank of England’s long-term forecast for the UK economy is for there not to be a recession before 2020.
Bryn Jones, who runs the £1.1bn Rathbones Ethical Bond fund, has said Mark Carney “messed up” Brexit, by cutting interest rates when he did, as the economy was already growing, so the only impact was to create much higher inflation.
But Mr Carney, speaking before the economic affairs committee of the House of Lords on 30 January, said the Bank’s forecast in August 2016 was not for a recession.
"It was for 0.8 per cent growth in 2017. It is important to recognise that the Bank’s forecast at the time, given the information available at the time, was above the average forecasts of consensus, in a quarter when external forecasts followed through on where the surveys were with straight recession being forecast.”
The UK economy grew by 1.8 per cent, rather than 0.8 per cent in 2017.
The Bank of England governor added: “What caused the discrepancy—the 1 per cent difference between the two—with the wisdom of hindsight? The first fact is that the world economy is much stronger and the European economy is much stronger.
"The world economy is stronger by half a percentage point and the European economy is stronger by one and a quarter percentage points. World trade is accordingly much stronger as well. That effect coursed through the UK economy.
"Our estimate is around 0.4 of that 1 per cent, so 40 per cent of that discrepancy is a consequence of the stronger world economy.
"The second factor is improved financial conditions relative to the conditions at the time and our expectations of those financial conditions—I think about 0.2 or so added there.”
fUK equity income fund manager Neil Woodford is among those to have noted the improved financial conditions in the increased levels of lending by banks, which underpins his view that the UK economy will continue to perform better than expected.
Mr Carney added a slowing in the pace of spending cuts by the UK government since the referendum has contributed to the stronger economy.
He told the Lords: “The balance—around 40 per cent of the discrepancy, or 0.4—is what you have pointed to, which is investment and, in particular, consumption and housing.
"The difference there was that we had expected tighter financial conditions, which would have affected both, but also higher levels of uncertainty affecting both consumption and housing.”
The House of Lords committee asked Mr Carney about a comment attributed to the central bank’s chief economist Andy Haldane, who was reported to have described the bank’s forecasts for the UK economy as its “Michael Fish moment”, a reference to the weather forecaster once saying there would be no storm when there was.
Mr Carney said the quote was a reference to the global financial crisis and not Brexit, and that the newspaper which first reported it, the Guardian, got the quote wrong.
He was also cautious on the relative health of the UK economy, he said that while business investment in the UK grew by 2.25 per cent in the first eleven months of 2017 (the December figure is not available yet) when the Bank of England forecast was for a fall of 2 per cent, this 2 per cent growth is not impressive when considered alongside global growth of 4 per cent.
David.Thorpe@ft.com
