The Bank of England's Monetary Policy Committee was too slow to lower its growth forecasts to reflect the deteriorating outlook for the UK, Sir Mervyn King said yesterday, as an independent think-tank predicted that the British economy would expand by just 0.9 per cent next year.
"We should have done it earlier and we didn't," Sir Mervyn King told the Commons Treasury Select Committee at a hearing on the Bank of England's November Inflation Report. He added: "There are times when you debate something and you finally decide, well look, this judgement really has to change now."
The Governor was asked by the committee's chairman, Andrew Tyrie, why the MPC's forecast fan charts in previous reports had shown a possibility of UK growth bouncing back strongly. Sir Mervyn replied: "Looking back, I think we wish we had not done that in earlier Inflation Reports but… there comes a point where you say we really are now pretty convinced that it doesn't make sense [to present such a forecast]."
Last month, an external review of the MPC's growth forecasting performance in recent years by David Stockton, a former official at the US Federal Reserve, noted that the Bank had failed to carry out a "systematic, detailed quantitative analysis" of its mistakes in this area. Another review of the Bank by the veteran financier Bill Winters criticised the institution's culture under Sir Mervyn and said that less senior staff at the bank were "often unwilling to challenge their superiors". Sir Mervyn told the committee: "I don't think I recognise those concerns".
Sir Mervyn's appearance came as the Organisation for Economic Co-operation and Development slashed its forecast for the British economy in 2013 to 0.9 per cent, following a contraction of 0.1 per cent this year. The Paris-based think-tank, echoing the advice of the International Monetary Fund, also recommended that the Chancellor should not impose further austerity further to meet his target of reducing the national debt by 2015-16 if growth continued to come in lower than hoped.
Meanwhile, the Office for National Statistics yesterday confirmed that the UK economy grew by 1 per cent in the third quarter of 2012, but many analysts expect a return to contraction in the final three months of the year. The latest growth official growth estimate showed that the Olympics boosted household spending in the third quarter and also tourism.
"If anything, the details in the new data further highlight the temporary nature of the upturn," said Chris Williamson, an economist at Markit. "Payback is likely in the fourth quarter, with the country facing a slide back into contraction."
Benitez out, King in?
George Mudie, a Labour MP on the Treasury Select Committee, said that the decision to transfer the coupon payments from the Bank's £375bn quantitative easing programme to the Treasury had left Sir Mervyn King looking "as independent as a Chelsea manager". The Governor pointed out that at Chelsea, currently led by Rafa Benitez, "few managers have managed to survive 10 years". Sir Mervyn said he would have been rightly accused of being "despotic" if he had refused.