A Dog's Dinner

In a recent blog, I warned that I was itching to be a bit punchier in my commentary and in saying that I had anticipated that last week's interest rate decision by the MPC and its accompanying forecast update would provide a perfect opportunity for me to vent my spleen. True to form, the MPC did not disappoint, and neither did the press conference after the announcement and nor did the media commentary in its wake. The whole charade was ridiculous, and judging by the comments of someone much wiser than me, who has been either a part of these events or a witness to them since 1993, it plumbed new depths.

Before outlining why this whole event turned into a dog’s dinner, I need to apologise to readers who are not particularly interested in the UK economy and want a more global commentary from me. I just could not let this one go.

Last week’s events started with the interest rate decision – a 25bps reduction – which itself was quite interesting, as well as the accompanying Bank of England forecast update. To help give some context to the rate decision, as usual, a lot of detail was provided by the Governor, Andrew Bailey. But this is unique to the Bank of England. The FED only provides a dot plot graph, and the ECB is equally parsimonious with information accompanying its decisions. Maybe these organisations are right to keep their forecast detail to themselves because once again, a close examination of the detail of the Bank’s forecast and its changes from the last update in November reveals a series of implausible and inconsistent assumptions that make absolutely no sense.

The table below is busy and contains a lot of fairly detailed information, but it clearly shows how the Bank of England’s forecasts have evolved over the last year and, most importantly, what has changed between what the Bank said in November and what was revealed last week. The headlines focused on the reduction in the Bank’s growth forecast for calendar 2025 and the significant increase in its near-term inflation expectation, which it now believes will peak at 3.7% later in Q3 this year.

So, in the table, look at the change from November 2024 to Feb 2025. The growth forecast for 2025 has halved to 0.75% and the inflation forecast (CPI) has gone from 2.75% to 3.5%.

The extremely odd thing, though, is how the Bank arrived at this lower growth and higher inflation forecast relative to what it said in November after the budget.

Again, if you look at the Nov-24 and Feb-25 data, you can see very small reductions in household consumption and business investment. Although small in the context of these first two, there is a significant reduction in housing investment—clearly not boding well, if you believe this stuff, which I don’t, for Angela Raynor’s housebuilding targets.

As an aside, according to the publicly quoted housebuilders, who dominate the industry in the UK, there is no intention to cut the rate of new housebuilding in 2025. Quite the contrary, nearly all are expecting to increase completions this year.

In fact if you look in a bit more detail at the November 2024 and February 2025 data you can see that the most significant underlying change to the Bank’s forecasts has been caused by a sudden shift to a significantly worse net trade contribution caused by a very large reduction in the expectation for growth in exports from 2.25% in November to a reduction of 0.75% in February. This significant change, which has the biggest impact on the growth forecast, received no attention at the press conference, was not mentioned by Bailey, was not commented on in the report, and I have not seen one reference to it in any media article. Now, those of you who have read my previous blogs will know that this data series is incredibly volatile and is frequently significantly revised. My guess is that Bailey didn’t mention it because, in reality, he hasn’t got a clue what’s going on here. There has been no material shift in the terms of trade confronting the UK since November, currencies, if anything, have been favourable for UK exports (£ weaker recently) and neither has there been a noticeable change in the economic fortunes of our export partners. So why this significant change in the Bank’s forecast? This question remains unaddressed and unanswered.

As for the very significant increase in the Bank’s inflation forecast, this too remains shrouded in mystery. Bailey spoke about energy prices in the press conference and even had a chart to show the audience. He talked about a cold European winter, higher gas prices, and some base effects. However, again if you look at the forecast, the change since November (last but one row) is small. What led the Bank, in the space of three months, to so significantly increase its inflation forecast was again a key unaddressed question. Remember, last November the Bank already knew about the increase in bus fares, VAT on private school fees, higher excise duty on cars and presumably had some expectation about higher water bills which although small in the consumer basket, have seen a big increase recently. So, the other big change seen in the forecast from November is also shrouded in mystery.

Employment

Unfortunately, the inconsistency doesn’t end there. If you still have the patience, take a look at the data series on employment and the last line, private sector regular pay growth. The latest forecasts see stronger employment growth than in the November forecast and a big pick up in regular pay growth to 3.75%. In other words, the Bank now believes businesses across the UK will employ more people and pay them more than it thought in November. But at the same time, the Bank requires us to believe that those same businesses will be seeing a weaker growth outlook and, by proxy, lower sales. So, in its infinite wisdom, the Bank requires us to believe that businesses across the UK will employ more people and pay them more money than it thought in November to produce less output. Now, I have been analysing businesses for the best part of forty years, and I have yet to meet anyone who would admit to doing that. It makes no sense to me at all. In fact, it’s embarrassing.

GDP Growth

The final piece of analysis, which I think also shows how little attention is paid to the composition of these bizarre forecasts, comes from a comparison of the first and last columns. In February 2024, the Bank forecast that the UK economy would grow at 0.75% – exactly the same as last week's forecast. But if you look down that first column and compare it with the last one, you can see that the Bank now thinks that household consumption and business investment will be growing significantly more strongly than it did in February last year. (The expectation for housing investment is unchanged, which is again odd because back then quoted housebuilders were building fewer new homes than they are forecasting to build now in 2025). Yet again, according to the Bank, the thing that will drag the economy back and cancel out this better growth from household consumption and business investment is the contribution from net trade, something that is incredibly volatile and virtually impossible to accurately forecast and which receives absolutely no attention from the Governor, economists (apart from the one I talk to) and the media.

So, if the media were accurately characterising the economy's outlook in light of the Bank’s latest announcement, it should say that the slowdown is all about net trade and has nothing to do with any significant changes to the outlook for the domestic economy.

The other thing that is missing from this Bank of England analysis is any focus on the contribution from government spending on the economy. As much as I am a critic of the budget and its bungled tax measures, it will result in significantly higher public spending in 2025, and this will contribute to growth this year of approximately 0.75% according to the numbers that I believe in, and are provided by my trusted economics guru. The Bank knew about this spending increase back in November, but I can’t see the influence of this boost to growth in any of the Bank’s summary forecasts. It seems to have been ignored, which I am trying to convince myself can’t be true and just reflects my inability to understand the Bank’s painstaking analysis.

The reality is that what we are confronted with here is yet more economic mumbo jumbo from the Bank of England and the MPC. Many words about words, characterised by a ludicrous debate about the MPC’s use of, and what is meant by, “gradual” and “careful”. Inexplicable lurches by the most hawkish member of the committee to the most dovish, in her call for a 50bps point cut which strangely accompanied a huge increase in the Bank’s inflation forecast, and much commentary on unmeasurable and unknowable academic concepts like the output gap and potential supply capacity.

Conclusion

My conclusions are that once again, the Bank has delivered an updated forecast that looks incomprehensible and full of obvious contradictions. It doesn’t stack up and will yet again be proved wrong. In some ways, I think the committee has tacitly accepted this by cutting rates and guiding to more to come, against a forecast that apparently tells them that inflation risks must have risen.

I think growth in 2025 will be much better than the Bank has forecast, and inflation will not get anywhere near 3.7%. However, the key thing the MPC can and should do for the economy is carry on cutting rates and as they do, this will naturally rebalance the interests of savers and borrowers in the economy and result in slower deposit growth, a recovery in lending growth, better business and consumer confidence, more spending and a faster growing economy.