{"id":434370,"date":"2011-06-01T23:00:54","date_gmt":"2011-06-01T23:00:54","guid":{"rendered":"http:\/\/www.ghanamma.net\/2011\/06\/01\/boe%e2%80%99s-inflation-predictions-%e2%80%98progressively-worse%e2%80%99\/"},"modified":"2011-06-01T23:00:54","modified_gmt":"2011-06-01T23:00:54","slug":"boes-inflation-predictions-progressively-worse","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2011\/06\/01\/boes-inflation-predictions-progressively-worse\/","title":{"rendered":"BoE\u2019s inflation predictions \u2018progressively worse\u2019"},"content":{"rendered":"
\n

By Amaka Abayomi, with agency report<\/p>\n

The Bank of England\u2019s inflation forecasts have become \u2018progressively less accurate\u2019, leading to questions over the effectiveness of its interest rate setting, a think-tank is claiming.<\/p>\n

Research published by the Centre for Policy Studies today follows its analysis last week of the Treasury\u2019s poor record of predicting economic growth.<\/p>\n

Researcher, Ryan Bourne, found that between 2001 and 2004, the Bank\u2019s forecasts were \u2018almost spot on\u2019, with an average error of 0.1 percentage points.<\/p>\n

There was a slight growth of the error between August 2004 and May 2007, with the Bank\u2019s average forecast for inflation a year ahead at 1.9 per cent, compared with actual inflation of 2.3 per cent.<\/p>\n

But this average error of 0.4 percentage points, was still within normal forecasting margins of error, Bourne argued.<\/p>\n

However, since August 2007, the error has grown, with the Bank\u2019s average forecast of 1.9 per cent per annum comparing with 3.2 per cent in practice.<\/p>\n

This represents a \u2018significant error\u2019, Bourne said, given that the target was 2 per cent. It was a \u2018cause for concern\u2019 because the current historically low level of the base interest rate at 0.5 per cent is based on the Bank\u2019s projections.<\/p>\n

Currently, the Consumer Prices Index inflation is more than double its 2 per cent target at 4.5 per cent%.<\/p>\n

\u2018If its inflation targeting is to be plausible, then the Bank of England\u2019s Monetary Policy Committee must demonstrate a successful track record of forecasting inflation\u2019, Bourne said.<\/p>\n

\u201cThe Bank appears to have become worse at forecasting inflation over time, and has tended to underestimate inflation significantly over the past four years.<\/p>\n

\u201cThis potentially has implications as ultra-low interest rates are not politically neutral.<\/p>\n

\u201cOf course, they help to maintain business and consumer confidence. But they also punish savers.<\/p>\n

\u201cAnd they also allow real depreciation of very high levels of debt in the two most indebted sectors of the economy \u2013 the banks and the government.\u2019<\/p>\n<\/div>\n

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