Friday, 15 January 2010

Bank of England projections "Unbelievable"

Danny Blanchflower, former member of the Monetary Policy Committee (MPC), the body that sets the Bank of England Base Rate went on record this week as suggesting that the Banks’ projections of recovery were “unbelievable”. In an interview for the Citywire organisation Blanchflower said that the bank was forecasting that our recovery from this recession would be the “fastest we’ve ever seen” and went on to say that “it’s unbelievable, and we will see that”.

Analysts have for some time been expressing doubts about the pronouncements that have come from the Treasury, which have looked more like a sharp rebound than a process of recovery and now the BoE’s own forecasts seem to be coming under the same level of doubt.

What is not in doubt is that the most important economic decision of this century will be the point at which the financial support for the economy, the much talked about Quantitative Easing (QE), begins to be withdrawn. This will be a decision made by the Bank at such a time as they feel the economy has built sufficient momentum that it can stand on its own again.

The timing of the withdrawal of support is so critical because of the dire consequences of getting it wrong. If support is withdrawn too early (as might be the case if the over enthusiastic forecasts are believed despite what the fact might be telling us), then we risk the ‘Double Dip’ recession, that shows a glimmer of recovery only for activity to plummet further as we enter a prolonged period that might look very much like a depression. On the other hand, if support is given for too long we risk lurching sharply from recession to inflationary spike without the intervening few years of things feeling Ok that we are normally accustomed to in the general run of things. Thus, the decision around when to scale back on QE will undoubtedly be what shapes the next couple of decades of our economic prosperity.

No pressure gentlemen!

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