Bank ‘may not be able to forecast the next financial crisis’
The Bank of England is unlikely to be able to predict the next financial crisis, despite having learned from its “Michael Fish” moment, key staff have told MPs.
Gertjan Vlieghe – a rate-setting member of the Bank’s Monetary Policy Committee – warned that there were “unrealistic expectations” being placed on economics and forecasting models.
“I’m never confident of any forecast,” he said.
He explained that while the Bank will always review the cause of forecasting errors – when the economic outcome is different from central predictions – by exploring “all available data” and looking at a variety of economic structures and learning from any mistakes, no projection can be perfect.
“It is always going to be the case, even after we do all that, that there are going to be large forecast errors, that we are not going to forecast the next financial crisis, nor are we going to forecast the next recession.
“Models are just not that good,” Mr Vlieghe said during a Treasury Select Committee hearing yesterday, also attended by the Bank’s governor Mark Carney.
Chief economist Andy Haldane made headlines last month after saying that the performance of the economy since the EU referendum had been a “surprise” and admitted several forecasts in recent years had been missed.
He referred to failures in economic forecasting from the Great Depression in the 1930s to the Great Recession in 2008 when warnings were not heeded.
Mr Haldane compared the banking crisis to an infamous October 1987 weather forecast by BBC meteorologist Michael Fish, who wrongly denied claims a hurricane was going to hit Britain.
Hours after he said there was no hurricane coming “but it will be very windy in Spain”, there was devastation across the UK that claimed 18 lives.
Mr Haldane told MPs yesterday he made the Michael Fish reference because the tragedy ultimately led to greater diligence.
“The reason I mentioned actually that Michael Fish moment was because that story had a happy ending,” he added.
“After the 1987 hurricane, meteorologists put a huge amount of effort into their models, into their data, and that effort has now borne fruit.”
However, he admitted the Bank had a much more challenging task than predicting natural disaster.
“Our problem is intrinsically more difficult to theirs, and therefore perhaps the scope for us improving is somewhat more limited.”
Mr Carney defended the Bank’s predictions in the wake of the Brexit vote – which were higher than others that had forecast a recession for the UK – but acknowledged that factors like consumer behaviour could still confound its projections.
“Do we have a perfect model of the British household? No,” he told MPs.
“We might understand that no forecast as a prediction is perfect, that there’s probabilities around that, but that’s not what people hear, and we need to do a better job of explaining.”
Consumption has held up in recent months, despite initial expectations that economic uncertainty following the EU referendum would spook shoppers into capping their spending.