MacroScope

Forecasting gymnastics on the BoE’s printing presses

June 7, 2012

The fluctuating fortunes of the British economy in the last year have left forecasters in a fix, unable to make up their minds how much longer the Bank of England’s money printing presses need to roll on.

Forecasting gymnastics on the subject could make many economists Olympic contenders for the gold medal.

Deutsche Bank, Morgan Stanley and Lloyds Bank are the latest to predict the BoE will announce that it will buy an additional 50 billion sterling worth of government bonds, taking the total amount spent in the programme to 375 billion sterling.

That was a sudden change from saying just a week ago that there would be no further increase in QE.

Why such an abrupt hairpin turn?

“Last week’s May manufacturing PMI survey was, to put it simply, a game changer. Until then we had been arguing the BoE would sanction no more QE after ending the previous programme last month.  But conditions have worsened,” George Buckley, chief UK economist at Deutsche Bank wrote.

The overwhelming majority of economists polled by Reuters last week expected the Bank to keep policy steady, although many major banks have changed their forecasts since the release of a far weaker than expected factory survey on Friday.

“We are now expecting 50 billion pounds of QE (on Thursday) largely because we can’t see any reasonable grounds to delay. Things have generally deteriorated since May,” said Lloyds Bank economist Adam Chester.

About a year ago, like many other forecasters, Deutsche had placed a lowly 25 percent probability on additional QE beyond the 275 billion pounds the BoE had already conducted by that time.

But in February, after the BoE said that it would buy an additional 50 billion pounds worth of bonds, Deutsche ramped up its QE outlook, forecasting a total of 400 billion sterling.

Two months later, in April, Deutsche backed off that call, saying the BoE had done everything it could and wouldn’t do any more beyond the 325 billion pounds it had spent by then. And now, like many others, it’s calling for more again.

Analysis of past Reuters BoE polls show about two-thirds of all banks that provided forecasts for the BoE’s stimulus programme have flip-flopped on their call at least once in the last twelve months.

The list includes banks such as Citi, JP Morgan, Barclays, BofAML, HSBC and Nomura, among others.

To be fair, very few have managed to foretell the BoE’s money printing programme from the very start. But the scale of some of these forecast adjustments on QE are mind-boggling, not to mention the sums.

Citi — along with ING and Capital Economics — have consistently said the BoE will print over 400 billion pounds by the time it’s done, or about a quarter of Britain’s gross domestic product.

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