Crystal balls How the Bank of England got its forecasts wrong – again and again

1. The Bank thought inflation would be transitory

In May 2021, the Bank of England Governor Andrew Bailey insisted price pressures would be temporary.

He said: “So the really big question is, is [higher inflation] going to persist or not? Our view is that on the basis of what we’re seeing so far, we don’t think it is.”

It was a message he repeated consistently throughout the year. In July 2021, Mr Bailey stressed in his Mansion House speech: “It is important not to overreact to temporarily strong growth and inflation.”

The Bank surprised many analysts by keeping rates at a record low of 0.1pc in November 2021.

2. Then it underestimated the scale of price rises

The Bank first raised rates in December 2021. But though the Monetary Policy Committee acknowledged it had to act to combat inflation, it underestimated its scale.

Energy prices were rising long before Russia launched its full-scale invasion of Ukraine in late February 2022. In its Monetary Policy Committee report that month, the Bank said inflation would peak at 7pc that spring.

It could not have foreseen the war or its impact on energy prices, but the consumer price index rose rapidly, surpassing its forecasts to hit 9pc in April 2022, when the gas price crisis was just beginning.

3. Next, it overestimated them

Then the Bank swung its forecasts too far in the opposite direction. In August 2022, it released a forecast that predicted soaring energy prices and strong wage growth would push inflation up to “around 13pc” that autumn.

However, its peak – at 11.1pc in October 2022 – was far lower.

4. The ‘long’ recession that never arrived

In November 2022, the Bank said the UK would fall into the longest recession on record.

High energy prices and falling real household incomes would shrink gross domestic product 0.5pc in Q3 2022 and 0.3pc in Q4 and GDP would continue to shrink for two years.

This never happened. Data from the Office for National Statistics (ONS) confirm that the economy actually grew in Q2 and Q3 2022. In May 2023, the Bank was forced to make the biggest revision in its GDP forecasts in its history.

Although the UK fell into a very mild technical recession, defined as two consecutive quarters of falling GDP, at the end of 2023, new data released yesterday suggest that it is already over.

5. It was wrong on the tightness of the labour market

One of the Bank of England’s biggest problems with forecasting is the extent to which it has underestimated the tightness of the labour market.

In August 2023, wage growth hit 8pc, 0.8 percentage points higher than had been forecast by the Bank.

Speaking to the Lords economic affairs committee in February, Mr Bailey admitted the models the Bank has been using to estimate wage growth had not been helpful.

He said: “We have a number of models ... that estimate wage equations. None of which, frankly, has performed well.”