Investors might have overreacted to signs of economic slowdown, although they have been right to price in weaker global growth prospects, Bank of England (BOE) chief economist Andrew Haldane said in an interview in Britain’s Observer newspaper yesterday.
“What we have seen over the past week is financial markets catching up with the data,” Haldane said.
“Possibly overreacting to the data, but certainly catching up, because I think there has been a drip, drip, drip — globally I mean — of slightly below-par news for several months,” he said.
In a wild week for international markets prompted by fears about a recession in Europe and weaker growth globally, some readings of British government debt prices at one point implied markets expected no interest rate hike by the BOE at all next year.
That represented a sharp change from some recent expectations that key rates would start to rise from their record low of 0.5 percent, possibly next month.
Markets ended the week pointing to a rate hike about the middle of next year after Haldane said in a speech on Friday that kind of timing might not be a bad bet, given the slower growth outlook.
Haldane, who was appointed chief economist in June, also said that the BOE needed to improve its economic forecasting after it had proved overly optimistic about how quickly Britain would recover from the financial crisis.
“We can’t afford not to have the best model that economists can develop and we are going to do that. It will happen,” he said.
Haldane added that he wanted a “more granular” way of economic forecasting that is less reliant on averages and looks more at different sectors and income groups.
That kind of system would help the BOE as it considers using tools other than interest rates to manage Britain’s economy.
He said policymakers needed to have a better grasp of changes in the global economy too.
“The absence of that global financial weather map has never been more harmful,” he said.
Another BOE policymaker sounded a gloomy note about the chances of Britain’s economy recovering fully from the financial crisis in the next few years.
Martin Weale, one of two members of the nine-strong Monetary Policy Committee to have voted for a rate increase in August and last month, said in another newspaper interview that he feared productivity might not reach pre-crisis growth rates.
“I started off thinking we will start to make up that lost ground, that had been the previous experience. I now think that, over the timescale that’s material to our decisionmaking, we won’t,” Weale said in the Daily Telegraph on Saturday.
“[That] does mean that ... living standards aren’t going to grow as much as perhaps people have become used to,” he said.
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