UK Broad Money growth shows that the Bank of England has been wrong again

Today gives us an opportunity to take a look at the data for the UK money supply and look at the trends. Before we do so the subject of economic forecasting has come up and according to the BBC economics editor Kamal Ahmed a person fairly regularly featured on here has given a “withering response” to a suggestion that “economics is in crisis”. Of course the economics in crisis theme was even expressed by the Queen on a visit to the LSE in  November 2008. From the Daily Telegraph.

Prof Garicano said: “She was asking me if these things were so large how come everyone missed it.” He told the Queen: “At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.”

Well that’s all right then apparently. Actually the economics profession did act true to form when 4 years later on a visit to the Bank of England one of its economists offered an answer. However let us return to our individual.

One of Britain’s most highly respected economists has hit back at criticisms of economic forecasts.

When I discovered the identity and that it was Martin Weale I asked by whom he was respected? But let us continue with the piece itself.

They could not be expected to precisely predict the economic future but were based on “sensible inferences from past patterns,” he said.

Briefly I agree with him but there are two major problems here. These forecasts are made several years ahead to an accuracy of 0.1% when in fact they struggle to know whether the numbers are in fact going up or down. The quarter just past was an example of even a short-term forecast being very wrong. Also in an era of considerable change “sensible inferences from past patterns” are in fact not sensible at all. On the way even Martin Weale found himself admitting this.

“People say forecasts all turn out to be wrong,” he said.

“I regard that as a silly comment, forecasting is uncertain, that’s the nature of things, forecasts aren’t wrong or right, they are simply the best you can do.

You may note that the higher you get up the establishment food and pay chain the less responsible you are for anything “forecasts are wrong or right”, and yet those at the lower and middle ends of the scale would find themselves sacked for consistently being wrong.

Martin Weale’s Record

If we look back he was involved in the flawed monthly average earnings series and perhaps it was to him a “sensible inference” to ignore the self-employed. Also he has been an implicit supporter of rental equivalence in CPIH. That’s before we get to his U-Turns as he twice had a series of votes for Bank Rate rises from the Bank of England before changing his mind. In fact on the last occasion he appeared to do so with his tail between his legs. Even the  Financial Times had to put it like this in late July.

Only a week ago, Mr Weale gave a speech urging the BoE to wait “for firmer evidence” before cutting rates or expanding its quantitative easing programme to encourage spending.

So he then did what?

One of the UK’s top monetary policymakers has indicated he has changed his mind after a series of negative business surveys and now favours an immediate stimulus for the UK economy.

You may note how a man with a consistent record of failure is described by the media “top monetary policymaker” and “highly respected”. Is this what they mean by post-truth news? Oh and the basis of his change of mind must have been an unclear signal.

Although you can’t say there’s a clear signal, if you spend all the time waiting for a clear signal, it never comes.”

A concerted plan by the Bank of England

This has happened too often now in a short space of time. The Forward Guidance of not only higher interest-rates but soon of 2013/14 was obviously completely wrong. The initial post-Brexit guidance was wrong too as Kristin Forbes admitted last week. Now things which were issued as guides and people remortgaged on the back of are retrospectively described as subject to uncertainty. I believe that is called re-writing history.

Oh and should Professor Weale have the time from his role as a fellow of the ONS – it is hard not to recall Sir Humphrey Appleby pointing out that people got such roles to help cover up past mistakes- perhaps he is thinking of a way of filling it.

Mr Weale, who sat on the MPC between 2010 and 2016, said the OBR was “rightly” set up to take the politics out of Treasury forecasting and that it had done so successfully.

So in my financial lexicon for these times both “uncertain” and “successfully” are sub-sections of the word wrong.

Broad Money Surges

This is a real problem for Martin Weale and his media spinners. You see whilst Martin was spinning like a top with every business survey that came out the UK Pound had fallen and UK Broad Money growth was pushing higher. We now know that this has continued.

M4ex increased by £11.7 billion in October, compared to the average monthly increase of £14.5 billion over the previous six months. The three-month annualised and twelve-month growth rates were 6.9% and 7.8% respectively.

So we see that the taps are fully open although perhaps not everyone as bank lending dipped which means that the precious banking sector which the Bank of England has supposedly reformed is a barrier again. But as we look through the numbers there are other signs of easy credit.

Consumer credit increased by £1.6 billion in October, broadly in line with the average over the previous six months. The three month annualised and twelve-month growth rates were 10.6% and 10.5% respectively.

Okay but we have been told that Martin ( until July) and his colleagues have been prioritising lending to smaller businesses since the summer of 2013 with the Funding for Lending Scheme. So that must be really through the roof?!

Within this, loans to small and medium-sized enterprises (SMEs) decreased by £0.2 billion, compared to an average monthly increase of £0.3 billion over the previous six months. The twelve-month growth rate was 1.7%.

Er well no but the mortgage lending it is no longer supposed to help still seems to be rumbling on.

Lending secured on dwellings increased by £3.3 billion in October, compared to an average monthly increase of £2.6 billion over the previous six months. The three-month annualised and twelve-month growth rates were 3.0% and 3.1% respectively.


As you can see the “withering” response is from a man who looks set to be wrong yet again. If we step aside from the politics which are around here we see a Bank of England which has eased policy into a currency decline and now sees Broad Money growing quickly. In fact if we only grow by say 1.5% next year as many forecasters have recently upgraded us to then there is quite a road to 7.8% isn’t there? A rule of thumb would be that we might expect inflationary pressure of 6%. A lot of care is needed here because the leads and lags in such calculations can be unpredictable and if the money supply remains firm then growth will likely be higher. This is an area where in the 1980s a lot of mathematical models or what Dr.Weale would call “sensible inferences” blew up and had a HAL-9000 style moment. But there is a link and a causal relationship at play here which will mean that the Bank of England will have plenty of opportunity to mull the word “successfully” as defined above.

There was another sense of establishment entitlement at play when Dr.Weale left the Bank of England as it payed for his leaving do. From the Evening Standard.

The Old Lady of Threadneedle Street spent £3,324 on a retirement reception for the ex-monetary policy committee (MPC) member, who stepped down on August 8.

Dr Weale was also presented with a bound set of speeches covering his tenure, costing the Bank a further £416.

I do not know about you but I have had to pay for mine. Mind you was the bound set of speeches considered a punishment?


37 thoughts on “UK Broad Money growth shows that the Bank of England has been wrong again

  1. UK annual rate 2.3 at end of Q3 2016 with more to come in Q4 according to PMI’s. 2.3 rate was published two days after OBR figures in autumn statement. So immediately wrong and set to be further wrong:2.3(ONS)-2.1(OBR) = 0.2+0.1(at least for Q4)=0.3 wrong. But BBC do not seem to know about ONS.
    Also Mr Weale just plain ignores headlining and political capital gained from bad forecasting. Nor does he say much about forecasters admitting they were wrong. I read somewhere to the effect that economic forecasters should be regulated and have a forecasting license with points deducted from their license when in error. It might remove some of them from the scene or give then a forecast license ban.

  2. Forecasting is certainly difficult however they could ‘hedge their bets’ a bit by providing a range of probabilities and not forecasting to decimal places which is ridiculous to say the least. They, and policy makers, should then stick to them and not allow themselves to be swayed by people who have a vested interest in more stimulus, lower rates for longer etc etc. These people know how to press the right buttons to get the results they want and ever greater profits and bonuses on the back of them. The history of corporate results and inflation of asset prices proves the case when correlated to decisions taken after influence peddling by those with most to gain. I have yet to meet a CEO who would push for higher interest rates on corporate borrowings and hence a lower bottom line growth!

    • Hi Pavlaki

      The problem that forecasters have is the way they put out forecasts for the next five years. The truth is that we have little or no idea about 2018 onwards. That wasn’t hard to type was it? And would be easy to say but no-one at the establishment forecasters does.

      Back in the day the Bank of England tried to deal with it by using fan charts. There was some wry amusement as when inflation pushed higher in 2010/11 the fan chart needed the goalposts moved. Odd for something supposed to cover 100% wasn’t it?

      • If I remember the pre-Brexit forecast from George Osborne, we were told that the average household would be £4,300 worse off in 2030. I particularly liked the £300 at the end there, presumably included purely to avoid it being a round number.

  3. Excellent blog, Shaun.
    As to your central thesis, namely that these people aren’t very good at forecasting, the evidence on your side is well in evidence.
    I actually think that the problem is caused by the whole way in which the media treat different people, especially the BBC, as follows:
    1. If you are a politician, you’re bound to be lying and hiding something;
    2. If you’re “independent” (BoE, IFS, the King’s Fund etc etc), then you’re treated like some guru whose every word must be given the utmost respect.
    We have therefore come to see the BoE economists as wise and pure, whereas IMHO they should be subject to the same scrutiny as politicians.
    But I guess that we plebs just need to admire these great economists slaving over a hot leaving party!

    • Hi James

      There are obvious issues in the current spate of political attacks on bodies which are either independent or “independent”. I fear that the media are disciplined by the opportunity to ask the early questions at Mark Carney’s pressers and there goes both criticism and integrity.

      As you say what is wrong with some nuance. For example the IFS does some good work but its boss (Sir) Paul Johnson made a hash of the UK Inflation Review.

      • Its a good job you are not in the US Shaun, otherwise this site may well be on the ‘fake news’ list!
        Or you could look at that as a vindication for telling the truth.
        Sites as diverse as ZH and Naked Capitalism are on there, but somehow WolfStreet missed the cut.

    • Hi Anteos and thank you.

      Maybe that was why the media were reporting that Bank of England Chief Economist Andy Haldane was against the proposals. Perhaps he understands his own pension better than he claims.

      He did write an official letter to the Financial Times denying this yesterday. What was that about official denials again?

  4. Every economic forecast is wrong and many are quite wrong; being wrong is the certainty of economic forecasting; you cannot reasonably expect anything else. The variables are far too many and you do not have to be a believer in the Lucas Critique to question the whole rationale for this (it’s maybe arguable that the Lucas Critique is reinforced where you have a regime of economic forecasting driving policy).

    But surely the issue is not to criticize their competence but rather their reasons for elevating forecasting to be one of the litmus tests of economics. We didn’t have these forecast fifty years ago and the roof didn’t fall in so why do we need them now? If it’s to elevate the discipline of economics then it’s clearing failing as they prove their incompetence every time they speak and their arrogance by never admitting they are wrong.

    What I would criticize is not their incompetence, because they will never get it right; I would criticize their arrogance but more their stupidity in not removing forecasting from the process altogether. That way I doubt we’d be worse off and perhaps much better off.

    • We didn’t have these forecast fifty years ago and the roof didn’t fall in so why do we need them now?

      1, we dont

      2, we do because it keeps people in jobs

      3, we do because if the public cottoned on the lynch mob would be calling

      choose 🙂


  5. From 2008 to 2010/11 I used to give the BoE the benefit of the doubt and think they were working in uncharted waters and forecasting numbers was anyones guess. I then moved to thinking that they knew exactly what they were doing and purposefully mislead the public and the markets at great expense to the country for the sole benefit of the banks (and their own pockets).
    Now I really do think they are incompetent and have been promoted several levels above their capability. They are so bad that they border on the delusional.

    Pavlaki has a point, forecasters should say the rate will be between 6.5 and 8.5, we can’t be any more accurate than that as we are forecasters, not deities.

    What would we say if the Met Office gave an annual rainfall level for next year to a decimal place.

    They are forecasters in a very complex economic and political environment – we will forgive and respect them if they honestly say once in a while that they got it wrong but they get it right more often that Joe Public. But to never admit a mistake is just narcissistic.

  6. An excellent article, Shaun. I have no respect for Kamal’s utterings, because every time I hear him speak, it sounds as if he is in favour of Labour ideas or in favour of remaining within the EU, when he should be neutral. I agree with what others have said here that they should provide half a decimal predictions and within a range; as you have said so many times before, how can you predict to a decimal point. Truly ludicrous, as are the OBR predictions, which, if I remember correctly, have not once been close to being right. If any of these economists were worth any salt, they should be sacked because the predictions are truly awful; you might as well ask me to predict the economic future! They wonder why the public have lost faith in “experts”.

    And don’t get me started on the Met office predictions as they couldn’t predict their way out of a paper bag!

    • Hi Robert S

      Your point about the weather forecasting is well made. A few weeks ago I had a couple of appointments and as I planned to cycle across there I checked the weather carefully with the rain due to stop by 3pm. Fortunately I noted that was not so and dressed for it. Any way even the waterproofs struggled with the deluge which carried on into late evening. Later I checked the weather to note that the forecast had been changed retrospectively and anyone reading would think it was right all along. How like the Bank of England!

  7. Great blog as always, Shaun.
    I remembered looking at Martin Weale’s slides from his August 2012 presentation on “Housing and the Consumer Price Index”, so it seemed to me you understated things when you wrote “he has been an implicit supporter of rental equivalence in CPIH”. However, when I went back to look at the slides again, while the points made are outrageously slanted in favour of rental equivalence against alternatives, they don’t conclude with an endorsement.
    It is really a weird presentation, since it completely ignores the accounting approach to measuring owner-occupied housing (OOH) used in the RPI from 1995 forward. The accounting approach is one variant of the user cost approach, but it is clear that Weale identifies the user cost approach with the opportunity cost approach, and doesn’t consider the accounting approach worthy of his consideration.
    The misstatements considering the net acquisitions approach are brutal: the advantage of consistency with the treatment of durable goods in the HICP is shrugged off because “treatment of other durables is a simplification, not a desideratum”. This is simply false. Eschewing credit payments and the use of proxies, a net acquisitions approach to measuring consumer durables is the ideal for the HICP, not a simplification of something else. He claims that the net acquisitions weight could be negative, but this would never be allowed to happen. Net acquisitions of owner-occupied dwellings might be negative in a single year, but Eurostat regulations allow for pooling of several years data; so the weight would always be positive.
    He also says that in the UK it is hard to separate acquisition of land from acquisition of serviced lots, and argues that house price booms are really residential land price booms, so if the net acquisitions index protects against housing booms and busts it is largely because it mistakenly includes land prices in its measure. This strikes me more as an argument for rejecting the Eurostat’s net weight, gross price approach in favour of measuring net new acquisitions of houses, dwellings and lots combined. It is hardly an argument against the net acquisitions approach per se.

    • Hi Andrew and thanks

      I remember Martin Weale coming to the Royal Statistical Society and him giving a poor talk. In fact the talk was inversing to the titles and build-up he was given. He was plainly in favour of rental equivalence without actually saying so which is why I used the word implicit in my analysis. I suspect he already knew what would be chosen!

      Moving onto Canada I noted this today. I saw some links where the BoC Governor was asking for monthly service sector data. Is there general dissatisfaction with the data? I was a bit surprised as I think monthly GDP is a step to far ( nice to have but sadly unlikely to be accurate).

      • Thank you, Shaun. You are obviously well informed about developments in Canada.
        Here is a link to Poloz’s speech at the C.D. Howe Institute in Toronto and the Q&A session afterwards. (He started his speech by talking about the Ottawa Red Blacks’ upset overtime win over the Calgary Stampeders in the 104th Canadian Football League championship. It was the first Grey Cup victory for Ottawa in 40 years, and I went to the victory parade yesterday at noon. Glorious! The Red Blacks quarterback, Henry Burris, became the Donald Trump of the CFL, the oldest quarterback, at 41 years old, ever to win a Grey Cup championship, and he was also the most valuable player.) There is only one not very specific mention of problems with the services statistics in the speech, and as usual, Governor Poloz is slavish in his praise of StatCan when he should be telling it to pick its socks up. The measurement of government services by StatCan in particular is crude and amateurish, not nearly up to the standards of the Office of National Statistics. Two of my colleagues when I was working in the National Accounts myself, George Kitchen and Dave Connell, had better estimates for health and education more or less on the lines of what the ONS does, but they weren’t approved.
        I have mixed feelings about getting rid of the monthly GDP estimates, which I worked on myself. In the 2015H1 contraction, the monthly GDP estimates showed that it troughed in May; with quarterly estimates only, we could only say that it troughed in 2015Q2, and the rebound in June was so strong that it couldn’t possibly be dismissed as a statistical, not a real rebound. On the other hand, the monthly estimates are, and always will be, less reliable than the quarterly estimates. If you moved from a monthly to a quarterly frequency for the GDP by industry estimates this would still do nothing to eliminate the gross and quite unnecessary formula difference between the way GDP by industry and quarterly GDP by expenditure estimates are calculated, which only emerged thanks to the incompetent fashion in which the chain Fisher estimates were introduced in 2001. If Poloz really set a value on good statistics he would be upset about that instead of gushing about how StatCan is the best national statistical institute in the world, and so on and so forth.

    • “…and argues that house price booms are really residential land price booms…”
      If you look at the contrasting house prices in, say, London & N.Ireland, wouldn’t you say he has at least something of a point?

  8. Hi Shaun,

    I’m thinking that “sensible inferences” should be finding its way into your Liars Lexicon some time soon.
    Might I also suggest that “economics is in crisis” is actually a euphemism for “many economists seem to have their head up their collective ass”, or perhaps the less inflammatory “economics is not immune to ideology”?

  9. Hi Shaun
    Re ‘forecasts’ albeit in a slightly different yet vital area.
    The link below shows the UK electricity demand met by generation and interconnector inports at 18.00 hrs today.
    You will note that all conventional generation is at the ‘red zone’ ie nothing more to give. The French interconnector has somehow managed to produce alomost 1GW which given France has 30% of its nukes out of action is ‘heroic’ as French demand also entered the ‘red zone’. All those wonderful windmills produced 2GW.
    And its going to get colder as la nina bites. And France will not be able to repeat this effort when it does.
    Perhaps someone would like to say what exactly is going to happen when the 8GW of coal is no longer there very soon?

    • Hi JW

      Thanks for the reminder. I have to say it is rather troubling to note that as I type this the UK nuclear meter is in the red zone! Especially on a day when the sarcophagus over Chernobyl is in the news ( and yet to be finished). Also I note that whilst solar power has made great advances it is of no use right now, At the moment we seem to be supplying France as the reading on that small dial is -2.8%.

      Thanks by the way for the smart meter link which I will look at tomorrow.

      • Yes, since France had problems with 30% of its nukes, the interconnector has been on net export. However as the UK neared peak demand today it was necessary to import , at great expense from French pump storage amongst other things. It reached a price of £1500/Mwh at 17.10 hrs.
        One retailer went under at the weekend, others are bound to follow, you need very very deep pockets to be a retailer/supplier under these conditions; ie one of the legacy companies with generation/distribution and/or state sponsored.
        The market is ‘broken’, it will be a minor miracle if there are no power cuts. It only needs one major outage at a large gas or coal plant.
        The ‘religion’ of climate change, and the incompetence of meddling politicians has resulted in the madmen running the asylum.
        Wrap up warmly and stock up on the candles!

        • Just wait until we’re all forced to have electric cars in the not too distant future!
          Millions of them on charge every night will require an even greater miracle!
          Mind you, the end of traffic jams would seem at last to be in sight thankfully.

    • Lots of people will be in the dark, just like the 1970s. On topic of solar panels. What happens to solar feed in tariffs, when Perovskite panels make solar cheaper than coal ?

  10. Hi Shaun. We seem to need Alice agiain to explain what’s going on at the BoE –

    “When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
    “The question is,” said Alice, “whether you can make words mean so many different things.”

    Obviously forecasts indicate what well respected economists choose them to indicate.

  11. “UK Broad Money growth shows that the Bank of England has been wrong again”

    Narrow money too certainly since mid 2015 hence my comment in December 2015 that as the BOE had failed to raise rates by that time a boost in inflation was already baked in due to arrive early to mid 2017 with the £ collapse, BOE rate cut and further QE providing even more pushes for the authorities to achieve their Holy Grail of very strong inflation, unless a growth spurt can take some of the sting out.

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