Leading economist Simon Ward has accused The Bank of England of using “smoke and mirrors” to present official forecasts for inflation. With the annual rate of price rises currently double the official target at 4pc and showing signs it will keep rising, the Bank’s central projection that the rate should return to 2pc next year is looking like pure fantasy.
Mr. Ward, chief economist of global investment fund Henderson’s, thinks the Bank is diverting attention from a far more worrying presentation of how fast it thinks prices will rise in the future.
“Inflation-targeting has become meaningless,” he said. “The opacity of the forecasting process and scope for creative interpretation of the remit and presentational manipulation imply that there is no effective constraint on the Monetary Policy Committee’s [MPC] ‘discretion’.”
Arguing that the Bank’s most recent quarterly forecasts show its mean forecast the mathematical average of projections is for inflation of 2.48pc two years ahead, if interest rates do not rise he said that as the mean forecast takes account of the skew of risks, it is a useful indicator as to whether the MPC is on track.. He warned that the latest figure was “the largest positive deviation from the target since February 1998 and clearly signal the need for higher interest rates”.
Since the numbers lying behind the forecasts are only revealed a week after the report is published, Mr Ward said “the caravan had moved on by the time the numbers are published”.
Mr Ward also thinks the Bank is being disingenuous when it refers to the projected path of inflation if interest rates rise as markets expect.
That, he said, allows the doves on the MPC the members who wants interest rates to stay low “to take credit for market-implied tightening without ever delivering.”
For instance, when the last set of forecasts were put out in February, the mean forecast looked to be on target two years away, when market expectations were factored in. However, at the time, markets expected a rise to come in the second quarter of this year. Mr Ward said the consensus among economists is that would not now occur.
In addition to these “presentational tricks”, Mr Ward argued that MPC members can change the forecast to suit the policy they want, as the process is reliant on judgement. He thinks the Bank should put more emphasis on where inflation will be in the nearer term, such as 12 months ahead.
The Daily Stirrer’s economic expert John de Roe has been warning for over a year that inflation was running much higher than official figures showed.