Reuters London
INVESTORS might have over-reacted to signs of economic slowdown, although they had been right to price in weaker global growth prospects, the chief economist of the Bank of England (BOE) said in an interview published yesterday.
“What we have seen over the past week is financial markets catching up with the data,” Andrew Haldane told Britain’s Observer newspaper.
“Possibly over-reacting to the data but certainly catching up, because I think there has been a drip, drip, drip – globally I mean – of slightly below-par news for several months.”
In a wild week for international markets prompted by fears about a recession in Europe and weaker growth globally, some readings of British government debt prices at one point implied markets expected no interest rate hike by the BOE at all next year.
That represented a sharp change from some recent expectations that key rates would start to rise from their record low of 0.5 percent, possibly in November.
Markets ended the week pointing to a rate hike around mid-2015 after Haldane said on Friday that sort of timing might not be a bad bet, given the slower growth outlook.
Haldane told the Observer that the bank needed to improve its economic forecasting after it had proved over-optimistic about how quickly Britain would recover from the financial crisis.
“We can’t afford not to have the best model that economists can develop and we are going to do that. It will happen,” he told the newspaper, saying he wanted a “more granular” way of economic forecasting that was less reliant on averages and looked more at different sectors and income groups.
That kind of system would help the BOE as it considered using tools other than interest rates to manage Britain’s economy. He said policymakers needed to have a better grasp of changes in the global economy too. “The absence of that global financial weather map has never been more harmful.”
Martin Weale, one of two members of the nine-strong monetary policy committee to have voted for a rate increase in August and September, said in another interview that he feared productivity might not reach pre-crisis growth rates.
“I started off thinking we will start to make up that lost ground. I now think that, over the timescale that’s material to our decision-making, we won’t,” he said in the Daily Telegraph on Saturday. “In the long run, living standards aren’t going to grow as much as people have become used to.”