THE EU DEBATE: WHICH BANK OF ENGLAND GOVERNOR IS RIGHT?

BILL JAMIESON

Oh, dear. I do seem to be getting it from all sides. Last week my pro ‘Remain’ ex-pat brother sent me a copy (in case I missed it – as if ) of Bank of England Governor Mark Carney’s letter to MPs warning that Britain risks a period of weak sterling, higher prices and lower growth if we vote to leave the EU.

The Governor said the only scenario he describes as plausible leads “to a lower path for growth and a higher path for inflation”.
In his letter to Andrew Tyrie, chairman of the Treasury select committee of MPs, Mr Carney, an appointee of chancellor George Osborne, set out the BoE’s view on the effects of a 10 per cent drop in sterling.

The BoE’s analysis is that if a 10 per cent fall in sterling came for no underlying reason, it would push prices up 2.75 per cent over four years, raising the annual inflation rate by about 0.75 per cent a year. It would also boost growth by lowering the price of UK exports and encouraging companies and households to buy British rather than spend more on higher-priced imports.

Mr Carney added that these rules of thumb would not apply in the event of Brexit because “if increased uncertainty were a key underlying cause of this depreciation, aggregate demand might be affected.

“Greater uncertainty could lead firms to postpone some investment projects and households to defer some spending”.

Let’s just briefly recall for now Mr Carney’s recent and somewhat erratic record on interest rate forecasting – the main function, after all, of the Bank of England’s prestigious Monetary Policy Committee.

To a fanfare of publicity in August 2013 he launched his policy of interest rate “forward Guidance” designed to help households and businesses “plan their spending and investment with more confidence”.

Mr Carney subsequently warned that interest rates would rise in 2014. They didn’t. Then in 2015. They didn’t. In fact, he has had to retreat on the very statements designed to help households and businesses “plan their spending and investment with more confidence”.

These reverse ferrets should not have surprised us. Economic forecasting is a treacherous business. I do not blame the Governor for wanting to predict the future and certainly not for amending his view when previous guidance proved incorrect.

Flawless crystal balls are in short supply – even for central bankers.

But my other concern is this. There is no great unanimity of view among central bankers, either on interest rates or on the consequences of “Brexit”. Indeed, even within the esteemed ranks of Bank of England governors there is no unanimity.

Take the previous Bank Governor Mervyn King. He was interviewed recently by Merryn Somerset Webb, a widely respected financial journalist and Editor of the acclaimed Money Week.

She writes that the former Governor is deeply unimpressed with the current debate, which he reckons consists largely of “exaggerated claims about either the cost of leaving or the benefits from leaving”.

Nor, she added, is he interested in “all these letters signed by various people telling us what to do”.

King pointed out that far too often economic forecasts turn out to be plain wrong and that nearly all the claims made during the 1975 referendum campaign were hugely inflated.

“The idea that somehow it’s either going to be bliss if we leave or a complete disaster…is a gross exaggeration,” he told Merryn in last week’s issue. In reality, whether we had voted in favour or against remaining in the EEC, it wouldn’t have made very much difference at all.

“The idea that somehow it’s either going to be bliss if we leave or a complete disaster…is a gross exaggeration.

”
Keen followers of the referendum debate will recall that these claims coincided with a controversial – but widely flaunted – report from the Organisation for Economic Co-operation and Development (OECD) claiming that leaving the EU would result in three per cent lower growth than would otherwise be the case by 2020, rising to five per cent in 2030 – costing each household an average £3,200.

For the ‘Remain’ camp this was seized upon as manna from heaven. But it didn’t take the Leave campaign long to pick holes in this projection.

The OECD’s figures, for example, assume that the UK would not be able to secure a trade deal of any kind by 2020, which has been slammed as “very implausible”.

Others have questioned the credibility of projected forecasts of lost household income a decade out. If an investment salesman pitched to us forecasts of our wealth ten years out on questionable assumptions, would we not be just a tad sceptical?

“On this one”, writes Merryn, “we’re with King. We’re tired of all these ‘assertions not arguments’. The former governor is trying to look beyond the politicking to get to the issues that matter most – a genuine vision of the future for Britain’s role in, and relationship with, the rest of Europe.

”
Well said, Mervyn – and thank you, Merryn.

 

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