The trials of economic forecasting

Getting to grip with life policies

 

The Bank of England’s head is finding forecasting difficult. Take the question: when will UK interest rates rise?

It looks a deceptively easy question, but it has caused some difficulties for Mark Carney, Governor of the Bank of England and one of the people who sets interest rates. Shortly after he took up the role last summer, Mr Carney introduced ‘forward guidance’ to give businesses and individuals a steer on when the Bank would start to consider a rate increase. In August 2013, Mr Carney stated that an unemployment rate of 7% would be the trigger, a target he expected to be reached three years hence.

By February this year Mr Carney had buried that guidance, as it became clear a 7% unemployment rate was imminent. His replacement guidance was much vaguer and he deliberately avoided making himself beholden again to a single economic number. At the time, the Bank was implicitly forecasting an interest rate rise in spring 2015.

In June, the picture suddenly changed again when Mr Carney addressed the great and the good of the City of London assembled for the Lord Mayor’s Banquet at the Mansion House. On the subject of increasing rates, Mr Carney said "It could happen sooner than markets currently expect" Those few words set the markets thinking that the longstanding 0.5% base rate could disappear before the end of the year.

One member of the House of Commons Treasury Select Committee compared Mr Carney’s words to those of an "unreliable boyfriend" – one day hot, the next day cold. Mr Carney’s real problem is that he has been attempting to make a series of short term economic forecasts. There is a lesson here for all investors, however knowledgeable: if you think you can predict how markets will move in the near term, you are almost certainly deluding yourself. Far better to ignore the short term ‘noise’ and take a long term view. Do get in touch to discuss your investment strategy.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

 

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The information in this article does not constitute advice and should be used for informational purposes only. This content has been provided to Helm Godfrey by Taxbriefs.