–BOE King: MPC Expects GDP Data to be Revised Up Slightly
–BOE King Rejects Call to Publish Inflation Report Point Forecasts

LONDON (MNI) – After January’s data, first quarter inflation is
more likely to be in line with the Bank of England Monetary Policy
Committee’s forecast and the MPC expects fourth quarter GDP to be
revised higher, Governor Mervyn King said Monday.

In a speech on uncertainty in macroeconomic policy making, King
highlighted the communication problems facing the MPC when it publishes
its quarterly forecasts. He rejected the call from some economists to
publish its suite of point forecasts – the mean, median and modal
forecasts – at the same time as the report.

King argued that publishing the point forecasts could lead to
over-simplification and over-interpretation of the MPC’s forecasts.

Q1 Inflation On Track

The January inflation data showed CPI came in at up 3.5% on the
year. In its February Inflation Report the MPC forecast CPI would rise
to average 3.3% in Q1 on both flat and unchanged interest rates. The
3.5% CPI outturn in January entails a couple of 3.2% results in January
and February would put CPI in line with the BOE’s projection.

King said the January data “showed that inflation had indeed risen.
So it now looks even more likely that inflation in the first quarter of
2010 will be close to the middle of the MPC’s fan chart.”

The February Inflation Report also showed the MPC expected Q4 GDP
to come in above the then latest estimate from National Statistics.

King said the probability fan around historical GDP data “reflects
the fact that economic data are frequently revised over time – sometimes
heavily.”

“The MPC believes it is more likely than not that the current
vintage of data will be revised up slightly. But the big picture of a
large decline in output is likely to remain even in the mature data,” he
said.

The BOE Governor restated his view that although, at first glance,
the MPC forecasts look optimistic on growth, with some strong
year-on-year rates, this is a misleading.

“The reality is that even if growth rebounds, the level of activity
is still very likely to remain weak for a considerable period compared
to the peak at the start of 2008,” he said.

“The economic environment is likely to continue to feel far from
normal for some time. After all, it is ultimately the level of activity,
rather than its growth rate, that matters for employment and the degree
of inflationary pressure,” he said.

King Rejects Analysts Call For Point Forecasts

Some leading financial sector economists have been sharply critical
of the BOE’s refusal to publish its mean, median and modal forecasts at
the same time as it publishes the Inflation Report.

The analysts believe a table of key summary statistics would
facilitate understanding. At present, economists and the media are
reduced to measuring fan charts to try and extrapolate the MPC’s modal
forecasts, and estimating mean and median forecast involves more
guesswork.

The BOE does publish these forecasts a week after the report is
issued and King is opposed to simultaneous publication.

“We fear that if we make such statistics available, all of our hard
efforts to communicate the outlook as a whole get washed away in an
extreme focus on point estimates,” he said.

“We do not want media commentators to summarise that outlook in a
single number, preventing us getting the broader view across,” he added.

He also argued that focussing on the point forecasts risks giving
the impression the MPC has a higher level of knowledge about the
likelihood of various outturns than it has.

“The MPC’s concern is that early publication of the numerical
parameters risks not only trivialising the policymakers’ overall view of
the economy, but misrepresenting that view by being overly precise,”
King said.

The MPC, however, is looking at ways of changing the presentation
of its forecasts by providing additional information.

King did acknowledge economists’ criticism that it is hard to
compare the MPC latest inflation forecast with its previous ones.

“One idea that we are investigating is to show charts of the MPC’s
view of the probability that inflation will be above the 2% target at a
particular point in time … Such a chart does speak to the whole
distribution, and it facilitates easy comparison with the previous
forecast round,” King said.

The problem with this approach is still that “it assigns a precise
probability to a given outcome,” again attaching spurious precision to
the MPC’s collective view.

He said another alternative the MPC is considering is to publish “a
probability ribbon” showing “a range estimate of the probability that
inflation will exceed target.”

This would state, for example, that the MPC believed the chance
that inflation would be 2% or higher in Q1 2011 at between 15% and 20%.

–London newsroom 0044 20 7634 1655; email: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$,MT$$$$]