How uncertain exactly is the uncertain BoE?
For a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.
Bank of England Governor Mervyn King referred to “uncertain” or “uncertainty” about the outlook five times at the May quarterly Inflation Report press conference according to the bank’s transcript, and the latest one didn’t seem much more confident in tone.
“There is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area,” King said in his opening remarks before taking questions from reporters.
Later on, he proclaimed that the recovery period “will take several years before we adjust back to anything we can call remotely normal.”
But just how uncertain is the BoE?
George Buckley, chief UK economist at Deutsche Bank, has come up with a revealing graph measuring the width of the BoE’s “fan charts”, which identify the distribution of probable outcomes in their quarterly GDP forecast, against the market’s main volatility measure, the VIX. They appear to track each other rather closely.
The spread on the fan chart between the weakest probable path for GDP growth and the strongest blew out to 7.5 percentage points in early 2009 from just over 2.5 percentage points before the financial crisis set in three years ago.
As the crisis eased, that spread narrowed a bit to 6.6 percentage points. Now it’s down to 6.2 percentage points, says Buckley — who wasn’t surprised much by new forecasts, which left room for the BoE to do more if the economy sputters.
One thing is fairly certain, however, based on their forecasting record. Their central projection will have to be substantially revised again.