Britannia Radio

TELEGRAPH  Blogs          17.2.09
Things will get even worse than we predicted last week, warns Bank of 
England
Posted By: Edmund Conway


Anyway, an interesting speech from Charlie Bean, the Bank of 
England's Deputy Governor (who was also out in Rome over the weekend, 
in the place of Mervyn King who is convalescing from a minor 
operation). There are some interesting lines, with the one most 
likely to dominate the headlines being his statement that: "the risks 
are heavily weighted to the downside, with roughly a three in four 
chance of growth turning out weaker than in the central [forecast 
provided by the Bank last week]."

As you'll recall, the Bank said it expects the annual GDP rate to 
drop as low as -4pc later this year, so it might seem flabbergasting 
that it could be lower still. In reality this is merely spelling out 
what is implied in the fan charts provided by the Bank - that there 
is a significant chance that things turn out worse than expected.

What's interesting is what this tells us about the Bank's suspicions 
of how badly the financial bail out package could be. Given that the 
central projection for growth is predicated on the package working, 
three-in-four must be the rough probability it attributes to the 
scheme failing, or at least going worse than swimmingly.

The other thing to catch the eye is the confirmation - in pre-
prepared text this time - that the Bank will consider buying gilts. 
Many economists were rather unsure last week about whether this - 
often considered the most direct and powerful of all "unconventional 
measures" at central banks' disposal once interest rates stutter - 
was really an explicit Bank policy. Clearly it is. Neither this, nor 
indeed Mr Bean's apparent equanimity about sterling's decline, will 
help the pound at all. But as I've said before, this is, in the long 
run, the best thing the country has going for it at the moment. Mr 
Bean also implies that further interest rate cuts are likely. 
Although I am still to be convinced that further cuts are all that 
useful, the Bank clearly thinks they are necessary before it embarks 
on full-scale quantitative easing.  [What on earth for?  It will just 
ruin a few more elderly savers while achieving absolutely NOTHING -cs]

Finally, but in my eyes most interestingly, he acknowledges the fact 
that the Bank had actually made warnings about the very factors which 
caused the financial crisis itself back in 2006. Bean said: "a number 
of bodies identified the vulnerabilities that were building up as a 
result of the accumulation of debt. Indeed, in 2006 our own Financial 
Stability Report highlighted many of the risks which have 
subsequently crystallised. And we debated these vulnerabilities at 
meetings of the Monetary Policy Committee on various occasions. But 
no-one really foresaw the virulence with which the crisis would 
unfold and the route it would take."

If this sounds familiar to regular readers it's perhaps because I 
alluded to it a little while back - I couldn't understand why the 
Bank had kept so quiet about it while others stole the plaudits for 
foreseeing the doom. Unfortunately for the Bank, while it should be 
congratulated for identifying the risk, this makes it doubly culpable 
for not doing enough to prevent it transmogrifying into a crisis.

Anyway, next interesting bit of data will come out tomorrow morning, 
in the shape of the inflation data.  [By the time you read this you 
will know it! -cs] There is a good chance the Retail Price Index, the 
most comprehensive cost of living data, will show we are in deflation 
for the first time since, I believe, the 1950s. The bad news is this 
raises the prospect of becoming stuck in a Japan style deflation 
trap. The good news is that now, for anyone who still has a job, even 
a wage freeze represents an effective real-terms pay rise.