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from MacroScope:
The perils of predicting BoE policy
As we’ve noted extensively, economists often get it wrong. Leaving aside their collective failure to recognise an impending global recession, you might recall a shock interest rate hike from the Bank of England in January 2007.
This was another event that almost every economist polled by Reuters failed to spot, and there are signs that four years on, economists might be setting themselves up for a similar shock.
The consensus from the last Reuters BoE poll last week showed interest rates would stay on hold into the fourth quarter, even though UK money markets have priced in a 100 percent chance of a rate hike by May. Since the January meeting, some of the bank’s Monetary Policy Committee members have publicly stated their determination to fight strong inflation.
But going back to January 2007, the only analyst out of the 50 polled by Reuters who predicted that shock rate hike was Simon Ward, chief economist at Henderson Global Investors. If the MPC does indeed flay analysts’ consensus this year by hiking rates before April, he stands to repeat his 2007 feat by being the only economist in the last poll to forecast a hike in the first quarter.
“I have been a bit mystified as to why other people haven’t shifted (their views) as inflation figures have really shot up over the last few months,” Ward told Reuters.
He suspects a somewhat dovish speech last month from BoE Governor Mervyn King wrong-footed economists, based on the presumption that King wouldn’t have sounded so dovish unless he was confident that rates would stay on hold for a long time.
“I think that interpretation was incorrect, and King has been outvoted in the past. It’s not like the U.S., where there’s a certain amount of pressure to follow the chairman’s lead,” said Ward.
from MacroScope:
Economists vs the zero barrier
Anyone involved in financial markets on a day-to-day basis will be familiar with bits of jargon like “breaking the psychological barrier”, “passing key resistance levels,” and even “magic numbers”.
While academics might argue if such things exist, market players put a lot of weight (and money) on the way certain financial instruments, indexes and currencies seem to behave near a certain number – usually a round figure.
Economists, looking months and years into the future to predict the path of entire economies, could well declare themselves immune to the superstitions of daily market movements.
But they too are victims of the psychology of round numbers – or to be precise, zero.
Take Tuesday’s shock preliminary UK GDP figures, which at -0.5 percent came well under even the most pessimistic forecast for +0.1 percent growth.
It’s always easy to say in retrospect, but there were some clues that a below-zero figure might have been on the cards. PMI surveys two weeks ago showed Britain’s service sector, which makes up the bulk of the private economy, declined unexpectedly in December, as did the construction sector. Retail sales figures for last month were also dire.
Still, no economist was willing to break through that zero threshold – and not for the first time.
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The Wall
