Belfast Telegraph

Bank of England 'may not be able to forecast the next financial crisis'

The Bank of England is unlikely to be able to predict the next financial crisis, despite having learned from its "Michael Fish" moment, key staff have told MPs.

Gertjan Vlieghe - a rate-setting member of the Bank's Monetary Policy Committee (MPC) - warned that there were "unrealistic expectations" being placed on economics and forecasting models.

While the Bank will always try to make improvements in light of any forecasting errors, no projection can be perfect, he said.

"It is always going to be the case ... that there are going to be large forecast errors, that we are not going to forecast the next financial crisis, nor are we going to forecast the next recession.

"Models are just not that good," Mr Vlieghe said during a Treasury Select Committee hearing on Tuesday, also attended by the Bank's governor Mark Carney.

The Bank's chief economist Andy Haldane made headlines last month after saying that economists had become embroiled in a forecasting crisis following the 2008 market crash, dubbing it the profession's "Michael Fish" moment.

He compared failures to predict the financial crisis of 2008 to an October 1987 weather forecast by BBC meteorologist Michael Fish, who wrongly denied claims a hurricane was going to hit Britain.

"The reason I mentioned actually that Michael Fish moment was because that story had a happy ending," Mr Haldane told MPs on Tuesday. "

After the 1987 hurricane, meteorologists put a huge amount of effort into their models, into their data, and that effort has now borne fruit."

But Governor Carney acknowledged that factors like consumer behaviour could still confound the Bank's projections.

"Do we have a perfect model of the British household? No," he told MPs.

"We might understand that no forecast as a prediction is perfect, that there's probabilities around that, but that's not what people hear, and we need to do a better job of explaining."

Consumer spending has held up in recent months, despite initial expectations that economic uncertainty following the EU referendum would spook shoppers.

However, the Bank is expecting consumer spending to slow, as inflation - triggered by the collapse of the pound - starts to feed into retail prices.

The Bank expects inflation to hit 2% this month, peaking at 2.8% in the first half of next year, before falling back to 2.4% in three years' time.

But some MPC members believe they are edging closer to the Bank's limit in tolerating above-target inflation of 2%.

Voting member Ian McCafferty said that the Bank was "closer to those limits" than six months ago, and that it would be key to monitor how inflation impacts business and consumer behaviour.

It raises the possibility that the MPC will raise interest rates from its historic low of 0.25% in order to bring inflation back to target.

Financial markets are factoring in two interest rate hikes over the next three years, though a broader "normalisation" could depend on the outcome of Brexit talks.

"It is clear that interest rates are going to remain lower than the sorts of rates that one got used to before the crisis," Mr McCafferty said.

"Whether we can start to see a gradual normalisation of policy I think is going to very much rely on how the economy responds to negotiations with the rest of the European Union about Brexit over the course of the next few years."