Bank admits to errors in its forecasting

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The deputy governor of the Bank of England, Charles Bean, has admitted that the recession "highlighted shortcomings" in the Bank's economic forecasting models.

He said that even had the Bank considered the possibility that the economy could shrink by more than 6 per cent, as actually happened, the Bank would have put the chances as being "virtually negligible".

The deputy governor, responsible for monetary policy at the Bank, also confessed that it was encountering puzzles in the behaviour of the economy during the downturn. The rise in unemployment during the recession, for example, was much smaller than might have been expected. Similarly, the creation of jobs in this recovery has been slower than in past times. Taken together, said Mr Bean, this suggested that the labour market was more flexible – with wage freezes being much more acceptable to workers – and that companies had been "hoarding labour". Other Bank officials have pointed to the faster pass-through of the higher import prices to shops following the 25 per cent depreciation of sterling since 2007.

Mr Bean said the economic indicators "suggest a far more modest margin of unused resources and, by implication, a substantial depression of potential output resulting from the Great Contraction". Other things being equal, that places Mr Bean slightly towards the "hawkish" wing of current opinion, and less well disposed to the idea of expanding quantitative easing (QE) than others who think the margin of spare capacity is much greater (and pressure on prices much less, therefore). The next announcement on interest rates and QE by the Bank's Monetary Policy Committee will be made on 4 November.

However, Mr Bean defended the central bank, arguing that it was not alone and "no forecaster came close to predicting the outcome". "One would need to be endowed with perfect foresight to have been able to predict how the financial crisis would unfold, spilling over from one institution to another, and from one market to another," he added. "Who knows what would have happened if, for instance, Lehman Brothers had successfully found a buyer that weekend in September 2008?"