Brexit: According to custom(s)

Discontent with the Brexit process has gathered momentum in recent weeks as the EU Withdrawal Bill is debated in the House of Lords. There are two key areas where the Lords disagree with the government’s vision of a post-Brexit Britain, having voted against that part of the bill which seeks to withdraw the UK from the customs union and also against the legislation which peers believe will result in an erosion of workers’ rights. None of this means that the government will necessarily water down its position, since the role of the Lords is primarily to scrutinise legislation and challenge anything proposed in the House of Commons and it cannot block legislation indefinitely. But it may embolden MPs in the lower house to rethink their position on many elements of the Withdrawal Bill.

The customs union issue is particularly important and has proven to be an area where Brexit protagonists have demonstrated that they do not fully understand the implications of their actions. A customs union implies the abolition of customs duties between member states and the imposition of common tariffs against those not in the union. That is not the same thing as the free movement of goods which is enshrined within the EU single market. For one thing, a customs union may not necessarily cover the full range of goods. For example, Turkey is part of a customs union with the EU but the deal does not cover food or agriculture, services or government procurement.

But failure to secure some kind of customs arrangement with the EU will almost certainly mean significant border delays. Those claiming that the Swiss and Norwegian examples show how a customs union can proceed without any such frictions are wrong. Switzerland and Norway are in the Schengen Area (chart) which allows individuals to move easily across borders, but neither are in the customs union so there can be significant delays as goods are transported across the border into the EU.

Moreover, most of the empirical work which utilises trade gravity models to look at trade flows draws the conclusion that leaving the single market or customs union will lead to a reduction in trade between the UK and EU. Such models explicitly incorporate the zero-tariff option, which can be  controlled for in simulations designed to show the counterfactual where tariff barriers exist. A customs union would, of course, be a second best solution compared to what the UK enjoys now. But it is better than no deal at all, and would go a long way towards resolving the Irish border problem.

What is particularly ironic is that the customs union has only become an issue following the referendum. It has been seized upon by those leavers who believe that it is an obstacle to signing trade deals with third countries, but was barely mentioned during the referendum campaign and was certainly not on the ballot paper. There is a sense that some in government are beginning to understand the difficulties involved in the customs union discussion with rumours earlier this week that the prime minister would seek to back away from her previous position (which were denied, of course). This would be the sensible economic decision, although so closely is Theresa May identified with this policy that it would likely spell the end of her tenure in Downing Street. But her departure may be a small price to pay to secure the national interest.

Looking at the issue from outside the UK, financial services remain an area of contention. Two senior EU officials this week rejected the UK’s case for continued post-Brexit access to EU financial markets under something approximating current rules. The EU’s chief Brexit negotiator, Michel Barnier, argued that since the UK would no longer be within the EU’s single market, it would not be covered by its regulations and oversight – a view reiterated separately by Valdis Dombrovskis, the European Commission’s finance chief. This may all be part of the normal poker playing during negotiations, but it highlights that despite the late-March optimism that we may be close to an agreement on a transition period, there are still plenty of areas of disagreement.

Indeed, the Bank of England recently concluded that the transition period would allow non-UK financial institutions operating in the UK to conduct business until the end of the proposed transition period (end-2020) without any change in their regulatory status. But there has been no reciprocal arrangement from the ECB, so firms licensed in the UK are not guaranteed to be able to conduct business in the EU under the current passporting arrangements after March 2019. If ever we needed a reminder that nothing is agreed until everything is agreed, this is it.

Silence can be golden

If you had asked me a week ago, I would have said that a rate hike of 25 bps by the Bank of England in May was a high probability event. However, I had reckoned without the intervention of BoE Governor Carney who warned in a BBC TV interview last week that any such move was not a done deal. In his words, “there are other meetings over the course of this year” at which a rate hike can be delivered. As a consequence, the implied market probability attached to a 25 bps hike collapsed from 80% last Thursday to 52% today, thereby turning a near-certain rate hike into a toss-of-a-coin event (chart).

It would appear that Carney was trying to warn the market that a string of weaker data argues against treating a May hike as a given. On the one hand, CPI inflation has slowed more rapidly than the BoE expected in its February forecast, coming in at 2.7% in Q1 versus a predicted 2.9%, with the March rate slowing to 2.5% - the lowest in twelve months. Then there is the likelihood that Q1 GDP growth will come in weaker than expected, posting a rate of 0.2-0.3% q-o-q (an annualised rate of 0.8% to 1.2%).

Whilst these are mere statements of fact when viewed in isolation, in my view neither are good enough arguments to postpone the rate hike. For one thing the weak activity data are largely the result of cold weather at the beginning of March (remember the Beast from the East?). In the sense that this is a temporary factor, we should be looking through it to assess the underlying strength of the economy especially since: (a) there may well be a partial countermovement at the start of Q2 and (b) previous attempts by the ONS to measure the impact of a cold spell on activity growth have tended to be revised away (as occurred in Q1 2012 for example when the initial GDP estimate posted quarterly growth of -0.2% but now shows a rate of +0.6%). As for inflation, it has long been known that it would begin to slow after peaking in the early months of 2018. The BoE has been softening us up for a monetary tightening on the basis that inflation is above target but now that it is less above target than expected, it seems they are backing away from their long-held view.

Around the same time as Carney was making his comments, MPC member Michael Saunders argued forcefully that “the economy no longer needs as much stimulus as previously” and that in terms of the pace of hiking “’gradual’ need not mean ‘glacial’”. That was a direct contradiction of Carney’s view – as is the right of external MPC members – but it sends a conflicting message to both markets and individuals and very much calls into question the usefulness of forward guidance as a policy tool. 

Forward guidance is designed to provide greater clarity about the central bank’s view and reduce uncertainty about the future path of monetary policy whilst delivering a robust policy framework. The Governor’s intervention just three weeks before the May rate decision does nothing to enhance clarity; has introduced more, not less, certainty about the path of interest rates and the differing messages from policymakers suggests that the policy framework is anything but robust. It is not as if this is the first time the Governor has blown a hole in the communications strategy. His comments at the Mansion House speech in June 2014 hinted strongly at a rate hike that did not materialise and led MP Pat McFadden to dub Carney “the unreliable boyfriend.”

As I have argued before (here), policymakers are making a mistake by focusing on the change in interest rates conditional on current economic circumstances when what really matters is the level of interest rates conditional on general economic conditions. Even if Brexit is curbing economic activity, as Carney argued, the economy is by no means falling off a cliff and therefore does not need interest rates at levels consistent with the threatened meltdown of 2009.I fully understand policymakers’ caution. After all, it is not just the markets that they have to convince: It is those individuals whose economic prospects are dependent on the path of interest rates. But I cannot help thinking that on credibility grounds, the MPC would be better advised to deliver the May rate hike they had strongly trailed, and allow themselves a more fierce debate about whether there is a need for additional tightening. As it is, they almost now cannot win. If they do raise rates next month it will call into question why Carney needed to wade into the debate. But if they don’t, it will raise questions about the message that the BoE was communicating in the two months prior to last week. Silence can be golden.

A shot across the bows

It is now eleven years since the first indications of the looming financial crisis began appearing on our radar screens. In the summer of 2007, banks began to curtail redemptions from funds which were heavily invested in collateralised debt obligations and subprime bonds. This set in train a series of events that culminated in the bankruptcy of Lehman’s in September 2008, which triggered the biggest economic and financial crash in 80 years. A decade on, and we are only now beginning to see indications that the scars inflicted upon the industrialised world are healing.

The IMF’s World Economic Outlook, released today, points to a further pickup in global growth in 2018 to 3.9% which is the fastest since 2011. The regional composition also increasingly looks more balanced, with slower growth in China and clear signs of recovery in the euro zone. But weak productivity growth and wage inflation in the industrialised world mean that workers may not immediately feel the benefit. Moreover, as the IMF pointed out, even though the global economy is looking stronger, a combination of weak productivity and adverse demographics means that the long-term potential growth rate in the industrialised world will be far slower than in the years prior to 2008 (the same also holds for China which is increasingly an ageing society thanks to the one child policy introduced in 1979 though subsequently abolished in 2013).

This obviously poses a problem for central banks, which wish to take back some of the monetary easing in place for the last nine years, and although the Federal Reserve has begun the tightening process, weaker potential growth will mean there are limits as to how far it can raise rates. But the Fed’s actions – and perhaps more importantly, its rhetoric – have contributed to taking some of the edge off the market rally with equity indices still some way below their end-January highs. My recommendation at the start of the year to reduce the degree of risk exposure in investor portfolios has thus been borne out by recent events. Recall, too, that I expressed concerns regarding the reliance of the US equity rally in 2017 on tech stocks, and the sharp collapse in this sector over the past month affirms my belief that now is not the time for rational investors to be taking risks.

However, I am less sure of my prediction that equities have 5-10% upside compared to end-2017 levels. Aside from the fact that all the good news is already in the price, the trade dispute between the US and China has changed the landscape somewhat and raised uncertainty levels. The actions of central banks are also increasingly a complicating factor.

Whilst the Bank of England looks set to raise interest rates next month, taking them above 0.5% for the first time since 2009, the weakness of inflation and the prospect of a loss of momentum in the real economy suggests that the case for further tightening is weaker than a few weeks ago. Meanwhile, the ECB continues to keep its foot to the floor and its asset purchase programme is likely to continue for another six months. The prospect of a monetary tightening in the euro zone any time soon is remote. But as I have noted previously, there is an argument for more aggressive tightening on this side of the Atlantic. Forget about inflation – the strength of economic activity alone suggests that we no longer need monetary policy on a setting designed to cope with the problems of 2009.

But as one investor asked me today, will this not lead to an undesirable slowdown in activity? It might, but there is a good case for using fiscal instruments to offset some of the pain. After all, monetary policy has done much of the heavy lifting over the past decade, and as the IMF pointed out “all countries have room for structural reforms and fiscal policies that raise productivity.” If we do not see some form of monetary normalisation, central banks will not have much conventional ammunition left to cope with the next downturn. As the IMF’s chief economist Maurice Obstfeld wrote, “global growth is on an upswing, but favourable conditions will not last forever, and now is the moment to get ready for leaner times. Readiness requires not only cautious and forward-looking management of monetary and fiscal policies, but also careful attention to financial stability.”

Markets may not like this prescription, but they have had a good run since 2009 and now it is time to put monetary policy on a sounder footing. European central banks take note.

Nasty and brutish? Surely they don't mean us?

I recently took part in a discussion at a European forum where I shared a platform with officials representing the UK and German governments on the topic of Brexit, and I have to say that I was more in tune with the German view of events than the British.

The UK government’s opening position is that Britain was always the bad boy in Brussels and that it never fitted into the EU in a constructive fashion, so that its departure should make life easier for everyone. That is an interesting sales pitch – and it is also largely not true. Whilst the British may have had a very different view of the EU and the direction in which it should head, compared to the French, that is less true of the Germans. Admittedly the UK and France have differed hugely on issues such as agriculture but the British influence has helped to reduce the amount the EU spends on agricultural subsidies from 73% of the budget in 1985 to 40% today, for which many EU members are thankful. Moreover, the UK and Germany have seen eye-to-eye on many issues and the UK played a very constructive role in making the EU a more business-friendly environment. Indeed it was a key player in helping to create the single market which the current UK government wants to leave.

The British government is also trying to sell the message to its European partners that the UK is the same country as it was before the referendum – nothing has changed and therefore it should be possible to conduct business as usual. I could not disagree more! The Brexit referendum has opened up numerous fissures in British society and in the conduct of its politics, such that this is very much a country ill at ease with itself. Leavers versus Remainers; young versus old; rich versus poor – and even the two main political parties struggle to find a common policy on Brexit. Indeed, I heard nothing to acknowledge the fact that almost half of those who voted in the Referendum wanted to remain.

Whilst the British government continues to adopt an “it-will-be-all-right -on-the-night” approach to issues such as the Irish border, the EU has adopted a rigorous legal approach which rightly points out that leaving the customs union is ultimately incompatible with maintaining an open border – a point which the German government representative reiterated. There is nothing new in any of this, of course, and I have been making many of these points for some time. But what concerns me is that the UK is holding to this fiction in the face of all the evidence. As one who does not work in the state sector I am not required to toe the government’s line, and I can afford to be free with my opinions. But it must be very difficult for those working on the inside who see the inherent contradictions in the government’s position but are not allowed to speak out.

Indeed, the disarray at the heart of government was manifest once again in the great WIndrush scandal. In short, immigrants from Commonwealth countries who began arriving in the UK in great numbers in the early 1950s are at risk of deportation if they never formalised their residency status and do not have the required documentation to prove it. This is a particular problem for those brought here as children, who have grown up in the UK and regard it as their home. Lest anyone forget, this is the result of a policy introduced by former Home Secretary Theresa May in 2013 (whatever happened to her?). Naturally, the policy is an embarrassment for the prime minister. But it goes way beyond that: It is indicative of a government which pays lip service to looking after the interests of its citizens but fails to do so and hides behind the letter of the law to justify its actions. And after having apparently agreed with the EU that it will guarantee the post-Brexit rights of EU citizens living in the UK, it once again calls into question the government’s competence to do so.

It was the philosopher Thomas Hobbes who wrote in his magnum opus, Leviathan, that life in the absence of a governmental-imposed social order would be “solitary, poor, nasty, brutish, and short.” Sometimes it feels as though the third and fourth words of his aphorism apply to life with a government too.

Fair weather forecasting

The economics profession has had to endure some bad press over the last decade in the wake of the global financial crisis which we failed to foresee and, in the UK case, the dire predictions in the aftermath of the Brexit referendum that were not borne out. But in a way these two examples are to entirely miss the point. Economics is not a predictive discipline – as I have noted countless times before – so criticising economists for failing to predict macroeconomic economic outcomes is a bit like criticising doctors for failing to predict when people will fall ill.

Another of the narratives which has become commonplace in recent years is the notion that economists predict with certainty. This fallacy was repeated again recently in a Bloomberg article by Mark Buchanan entitled Economists Should Stop Being So Certain. In fact, nothing could be further from the truth. The only thing most self-respecting economic forecasters know for certain is that their base case is more likely to be wrong than right. The Bank of England has for many years presented its economic growth and inflation forecasts in the form of a fan chart in which the bands get wider over time, reflecting the fact that the further ahead we forecast the greater the forecast uncertainty (chart). Many other institutions now follow a similar approach in which forecasts are seen as probabilistic outcomes rather one in which there is a single outcome.

Indeed, if there is a problem with certainty in economic forecasting, it is that media outlets tend to ascribe it to economic projections. It is after all, a difficult story to sell to their readers that economists assign a 65% outcome to a GDP growth forecast of 2%. As a consequence the default option is to reference the central case.

One of the interesting aspects of Buchanan’s article, however, was the reference to the way in which the science of meteorology has tackled the problem of forecast uncertainty. This was based on a fascinating paper by Tim Palmer, a meteorologist, looking back at 25 years of ensemble modelling. The thrust of Palmer’s paper (here) is that uncertainty is an inherent part of forecasting, and that an ensemble approach that uses different sets of initial conditions in climatic modelling has been shown to reduce the inaccuracy of weather forecasts. In essence, inherent uncertainty is viewed as a feature that can be used to improve forecast accuracy and not as something to be avoided.

In fairness, economics has already made some progress on this front in recent years. We can think of forecast error as deriving from two main sources: parameter uncertainty and model uncertainty. Parameter uncertainty is derived from the fact that although we may be using the correct model, it may be misspecified or we have conditioned it on the wrong assumptions. We can try and account for this using stochastic simulation methods[1] which subject the model to a series of shocks and gives us a range of possible outcomes which can be represented in the form of a fan chart. Model uncertainty raises the possibility that our forecast model may not be the right one to use in a given situation and that a different one may be more appropriate. Thus the academic literature in recent years has focused on the question of combining forecasts from different models and weighting the outcomes in a way which provides useful information[2], although it has not yet found its way into the mainstream.

Therefore in response to Buchanan’s conclusion that “an emphasis on uncertainty could help economists regain the public’s trust” I can only say that we are working on it. But as Palmer pointed out, “probabilistic forecasts are only going to be useful for decision making if the forecast probabilities are reliable – that is to say, if forecast probability is well calibrated with observed frequency.” Unfortunately we will need a lot more data before we can determine whether changes to economic forecasting methodology have produced an improvement in forecast accuracy and so far the jury is still out. Unlike weather forecasting which at least obeys physical laws, economics does not. But both weather systems and the macroeconomy share the similarity that they are complex processes which can be sensitive to conditioning assumptions. Even if we cannot use the same techniques, there is certainly something to learn from the methodological approach adopted in meteorology.

Economics suffers from the further disadvantage that much of its analysis cuts into the political sphere and there are many high profile politicians who use forecast failures to dismiss outcomes that do not accord with their prior views. One such is the MP Steve Baker, a prominent Eurosceptic, who earlier this year said in parliament that economic forecasts are “always wrong.” It is worth once again quoting Palmer who noted that if predictions turn out to be false, “then at best it means that there are aspects of our science we do not understand and at worst it provides ammunition to those that would see [economics] as empirical, inexact and unscientific. But we wouldn’t say to a high-energy physicist that her subject was not an exact science because the fundamental law describing the evolution of quantum fields, the Schrödinger equation, was probabilistic and therefore not exact.”

As Carveth Read, the philosopher and logician noted, “It is better to be vaguely right than exactly wrong.” That is a pretty good goal towards which economic forecasting should strive.

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[1] Blake (1996) Forecast Error Bounds by Stochastic Simulation 

[2] Bayesian Model Averaging is one of the favoured methods. See this paper by Mark Steel of Warwick University for an overview

Revisiting Brexit demographics

Even some of those who believe Brexit to be a thoroughly bad idea are beginning to realise that it is a process that cannot now be stopped. Indeed, I have long believed that full EU membership will end in March 2019 because of (a) the investment that the UK government has sunk into delivering Brexit, which will likely preclude parliament overturning the decision, and (b) the sheer cost in terms of time and effort required to deliver a second referendum which rules out the option that people will be given a chance to change their mind.

Wolfgang Münchau in his FT column last week gave four reasons why The time for revoking Brexit has passed: (i) both sides have made significant progress towards an agreement; (ii) domestic opposition to Brexit remains fragmented, which means that it has been hard for Remainers to find a credible figurehead to get behind; (iii) the UK economy has held up better than expected thus reducing the extent of buyers’ remorse and (iv) the EU has itself moved on, and having accepted that Brexit is inevitable is now turning to the issues which matter for its own future (relationships with the US and Russia and reforming EMU). Obviously this has not gone down well with hard core Remainers but sane commentators, such as the lawyer David Allen Green, increasingly point out that the energy would be better spent trying to shape the post-2019 transition rather than fight battles that have already been lost.

In order to consider what should be the appropriate strategy – fight Brexit or shape the future – consider the demographic evidence. The ONS’ population projections suggest that the 55+ cohort which voted predominantly for Brexit will have declined by almost 1.6 million between mid-2016 and mid-2019 (chart). To put this into context, the margin of victory for Leave was slightly less than 1.3 million. Not surprisingly, the further ahead we roll the numbers the bigger the decline,  such that by 2026 the 2016 cohort aged 55+ will have declined by 5.3 million (a 27% reduction). This raises the obvious question: In whose name is Brexit being conducted? It is all very well older voters opting to leave the EU but useless both to them and younger voters if they are not around to see it. So on that basis, there is an argument in favour of continuing to oppose Brexit.

As an aside, I did do some back of the envelope calculations a few months ago which bear repeating. If we were to apply a weighting structure based on the fact that younger voters have more to lose from leaving the EU and therefore we allow their votes to count for more, it is possible to come up with a scenario in which the June 2016 vote would have produced a Remain vote. Assume (arbitrarily) that votes account for a positive weight so long as voters are under the age of 90, with the weight derived as follows (90 – age / 90). For those in the 18-24 age group, if we assume a median age of 21, applying the formula gives their vote a weight of 0.7633; for those in the 25-34 bracket, the median age is 29.5 and the weight declines to 0.672. As age rises, so the weight declines. Even allowing for a low turnout amongst younger voters, survey-based evidence of voting patterns indicate this would be enough to give Remain a 52.5%-47.5% majority. Whilst such an idea should not be taken too seriously, as it cuts across the principle of one person-one vote, it does at least try to introduce some inter-generational fairness which many people claim is lacking in the whole debate.

The case for instead campaigning for the best post-Brexit settlement is also supported by the fact that the constituency most in favour of Brexit will soon become less politically relevant. The likes of Nigel Farage, who did so much to whip up Brexit support, might bewail the nature of any agreement hammered out between the UK and EU27 but he is increasingly becoming a political irrelevance as those who bought into his vision of a backward-looking Britain become less active (look out for UKIP to take a serious beating at the local UK elections on 3 May). The same may also be true for Jacob Rees-Mogg and Boris Johnson, the hardliners on the front line of Conservative politics, who belong to a party with an average membership age of at least 57 and whose numbers are only around 20% of their Labour opponents. The point, of course, being that Conservative parliamentary MPs will not in future have to be quite so beholden to their increasingly ageing party membership.

You can never say never on Brexit-related matters. But if there is to be any subsequent vote it will most likely only take the form of a parliamentary vote on the terms of the final agreement offered by the EU. After all, the will of the people has already been heard so there is no need to ask them again. It’s just a shame that large numbers of those who voted for Brexit will not be around to enjoy it.

Don't be casual with words

They say that the pen is mightier than the sword. Consequently, it is incumbent upon us all to use our words judiciously. But it is also important that those consuming any given message are careful to interpret the information given to them without extrapolating beyond what is in front of them. This is particularly important in a world riddled with fake news in which messages can be subtly tweaked to say something that was not in the original communication, which is then passed on down the chain like the old game of Chinese whispers. It is also an issue for policymakers, particularly central bankers who are trying to communicate with markets and the wider public.

This issue was thrown into sharp relief by the recent TV interview by British Foreign Secretary Boris Johnson, who in response to the question of whether Russia was the source of the poison used in the Salisbury incident replied: “When I look at the evidence, the people from Porton Down, the laboratory… they were absolutely categorical, I mean, I asked the guy myself, I said, 'are you sure?' and he said 'there's no doubt.'” Only this week, Gary Aitkenhead, the chief executive of the government’s Defence Science and Technology Laboratory stated that whilst the government combined the laboratory’s scientific findings with information from other sources to conclude that Russia was responsible for the Salisbury attack, “we have not verified the precise source.”

It would appear that Johnson jumped to a conclusion that may not (yet) be supported by the evidence – statistically known as a Type I error. Meanwhile, the more cautious Aitkenhead refused to deal in speculation – as befitting someone leading a team of scientists. But whilst there is a discrepancy between these two versions of events, which has raised question marks against Johnson’s judgement, it is important to note that Aitkenhead did not say that the source was not Russian, as some of the more excitable media commentators have suggested.

I was similarly struck by a Twitter exchange involving the physicist Brian Cox who noted that “we have a generation of senior politicians who were not taught how to think properly - more science in their education would have helped. They use imprecise, woolly language, which is symptomatic of woolly thinking.” Cox was careful not to dismiss the arts and social sciences but was nonetheless inundated with comments accusing him of doing just that, thereby rather proving his point. People may disagree, but what I interpreted Cox as saying was that science demands very high levels of certainty and many people could benefit from understanding what constitutes a reasonable degree of proof before making pronouncements in public.

But perhaps the problem is as much to do with the medium through which many of our news stories are filtered. Take, for example, the way in which the actions of central banks are reported. In August 2013 the Bank of England unveiled a forward guidance strategy based on the unemployment rate. It announced that Bank Rate would not rise from its then-current level of 0.5% until the unemployment rate fell to 7%. This strategy was conditional upon ‘knockouts’ designed to allow for rate hikes if certain threats to inflation became evident.

Although in fact unemployment fell well below 7% over the next twelve months, the Bank did not raise rates for a variety of reasons – domestic inflation was falling whilst the international environment was plagued by euro zone uncertainty and concerns over Chinese events. Nonetheless, many people fell into the trap of arguing that the Bank’s intentions did not match with its actions which rather destroyed its credibility. But it is important to look at exactly what the BoE said: “the MPC intends not to raise Bank Rate from its current level of 0.5% at least until the … headline measure of the unemployment rate has fallen to a threshold of 7%.” This was not a commitment to raise rates once unemployment hit 7% – only a commitment not to do so as long as it remained above the threshold, which is a very different matter.

Despite the best efforts of the BoE to explain the conditional nature of economic forecasts and the risks surrounding the central case projection, the subtleties of this message are often lost in media translation. Thus the mechanistic nature of the initial forward guidance rule was always given more prominence than it deserved. Perhaps the BoE should have been more aware that the issue would be construed in this way, and framing a rule based on the unemployment rate laid it open to more criticism than was necessary. I am not convinced that the BoE did a great job of communicating its message at the time, but it certainly was not helped by some of the reporting surrounding its commentary. 

In his latest speech, MPC member Gertjan Vlieghe suggested that in his view it is “useful to provide a snapshot of how today’s central growth and inflation forecast map into my view of the likely central path of interest rates.” This is exactly the approach adopted by the Swedish Riksbank which sets out an illustrative path for the policy rate conditioned upon its economic forecast. Vlieghe pointed out that “if growth and inflation turn out differently from this central forecast, the path of interest rates will be different too. That should not be seen as a mistake, or a breaking of an earlier promise. It should be seen for what it is, namely an appropriate response to a changed economic outlook.“

Whilst this is totally correct, past UK experience suggests that if the BoE were to adopt such a strategy, a large number of people will misunderstand the nature of conditional versus unconditional forecasts and use this as a stick with which to beat the central bank when it is unable to deliver on its forecast. We all have to choose our words carefully, but it seems that central banks have to do so almost us much as foreign secretaries