Photographer: Chris Ratcliffe/Bloomberg

Bank of England's Uncertainty Problem Puts a Question Mark on Policy Outlook

Forecasting more complicated since the U.K.'s decision to leave the European Union

The Bank of England has admitted an uncertainty problem that could have implications for its policy outlook.

In an interview with Bloomberg News this week, official Kristin Forbes said the central bank may be double-counting unpredictability effects following Britain’s decision to quit the European Union. How wide-ranging these miscalculations are and how the data evolves before the BOE updates its forecasts in November could be key to new growth projections and the odds of another rate reduction.

One problem is a lack of information. Governor Mark Carney and the Monetary Policy Committee have already faced criticism from pro-Brexit lawmakers for doing too much, too soon, after they cut the key interest rate to 0.25 percent in August and unleashed a broader package of stimulus.

The move coincided with the BOE's biggest ever downward revision to its forecasts, made with very little hard data. While initial reports have shown signs of resilience, officials won’t get an official reading of how the economy performed in the third quarter until the end of October.

As Dan Hanson, an economist at Bloomberg Intelligence, says much is left to judgment:

“When you’re faced with a shock that hasn’t been faced by anywhere else in the world, it’s very difficult. I wouldn’t expect them to move away from that immediately, but as the shape of the shock becomes clearer, and that only happens with data, they’ll undoubtedly refine the way they look at it.”

So Forbes’ comments don’t necessarily take further loosening this year off the table.

A majority of the nine-member MPC have signaled a willingness to back another rate reduction, unless their outlook changes markedly, and while economists in a Bloomberg survey see a lower probability of a recession, most still predict another rate cut will come in 2016.

Earlier this month, the BOE said third-quarter growth will probably be stronger than it initially thought. Still, much depends on the outlook for next year, when officials see expansion of just 0.8 percent, which would be the worst performance since 2009.

Kallum Pickering, an economist at Berenberg, said that after downgrading its forecasts so markedly, the BOE would probably have to revise them up in a hefty way to rationalize standing pat.

“To take out a November rate cut they’d have to revise up the forecast to about 1.2 percent or higher. I’m not sure they’d feel justified to do that after one quarter of better data.”

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