Aurelia Butler

The governor of the Bank of England has conceded there are “very big lessons to learn” in setting monetary policy after the central bank failed to forecast the recent rise and persistence of inflation. Along with other members of the BoE’s Monetary Policy Committee, Andrew Bailey told the House of Commons Treasury select committee on Tuesday that the bank’s own forecasting model was not delivering accurate results and the committee had reduced its role when setting interest rates.“The reason we are not following ‘the model’ is because there are asymmetric effects [in the BoE’s view of the path of inflation] . . . We have taken a conscious decision to aim off [the model’s predictions],” the governor said. He added inflation was likely to fall more gradually from March’s 10.1 per cent rate to the BoE’s 2 per cent target than the model had predicted. Instead of using the model’s results, Bailey said the BoE’s work was now to think hard about “how we operate monetary policy in the face of very big shocks”. He added: “We’ve got to get on top of it and get inflation down.” The BoE’s main forecasting model largely assumes that inflation will drop away as quickly as it appeared and the MPC has increasingly tweaked its results to override this. Officials say they now believe wages and prices will continue to rise faster for longer than the model’s central forecasts. While the BoE’s central forecast is for inflation to fall well below 2 per cent in 2025, the MPC thinks there is a 50:50 chance it will not drop below the target. Bailey refused to discuss whether interest rates, which the BoE raised to 4.5 per cent this month, would rise further. “I can’t tell you that we’re near to the peak or at the peak, but we’re nearer to the peak,” he said. His comments on the difficulties of forecasting inflation came alongside similar remarks from other MPC members, who all vote independently when the committee sets interest rates. Chief economist Huw Pill said the bank’s economic models had failed to cope with the recent extreme shocks to energy and food prices because they were based on periods without such shocks.

He added that the MPC could not rely on looking at past episodes of high inflation in the 1970s and 1980s because too many other factors influencing the economy had changed. Catherine Mann, an external MPC member, said she had voted for higher interest rates than the majority on the committee because she expected the big rises in inflation to lead to higher wage demands and to encourage companies to try to make price increases stick. More

As tensions have mounted with the United States, Chinese leaders have pledged to build a modern industrial system and achieve technological breakthroughs to win the “strategic initiative”.Over the last decade, China has sought to integrate the economies of the cities of Beijing and Tianjin and the surrounding Hebei province, known as Jing-Jin-Ji, which could also reduce income gaps in the region and curb pollution.”Faced with new situations, new tasks, and new requirements, as an important industrial development highland in China, the task of promoting coordinated industrial development in Beijing-Tianjin-Hebei is even more urgent,” the Ministry of Industry and Information Technology said in a statement on Tuesday.It said the region’s development will focus on sectors such as integrated circuits, network security and power equipment and biopharmaceutical industry. It will also develop industries in new energy vehicles, intelligent connected vehicles, biomedicine, hydrogen energy, robots, as well as research on artificial intelligence, life sciences, and aerospace technology, the ministry said.In 2017, President Xi Jinping announced plans to build the Xiongan New Area as part of a state-driven campaign to integrate the economy of the Jing-Jin-Ji region and ease congestion and pollution pressures in the Chinese capital.Earlier this month, Xi, during a high-profile visit to Xiongan – about 100 km (60 miles) southwest of the capital – pledged to move more state firms and other institutions from Beijing to the flagship city.Beijing has already moved some its universities, government departments and industrial firms to Xiongan, which is tasked with taking on some of Beijing’s “non-capital” functions. More

WASHINGTON (Reuters) -White House and congressional Republican negotiators will meet again on Tuesday to resolve a months-long impasse over raising the government’s $31.4 trillion debt ceiling, with the nation facing the risk of default in as soon as nine days.    President Joe Biden’s Democrats and the Republicans who control the House of Representatives, led by Speaker Kevin McCarthy, remained deeply divided about how to rein in the federal deficit. Democrats argue wealthy Americans and businesses should pay more taxes while Republicans want spending cuts.Biden and McCarthy emerged on Monday evening from their third meeting this year on the debt ceiling talking about the need to find bipartisan compromise, even as they cling to policies that expose the divides between the two parties. White House aides headed back to Capitol Hill after the meeting for further talks throughout the night. House Appropriations Committee Chairwoman Kay Granger, a Republican, also suspended work on pending funding bills this week “to give the Speaker maximum flexibility as talks continue,” she said in a statement.The lack of clear progress continued to weigh on Wall Street with U.S. stock indexes set to open lower Tuesday morning and global markets on edge. Biden and Democrats want to freeze spending in the 2024 fiscal year at the levels adopted in 2023, arguing that would represent a spending cut because agency budgets won’t match inflation. The idea was rejected by Republicans, who are insisting on cuts to 2022 levels, Democratic leaders said on Monday. Republicans are insisting federal spending must be significantly reduced so that overall spending goes down in the upcoming fiscal year even as military spending increases. Biden wants to cut the deficit by raising taxes on the wealthy and closing tax loopholes for the oil and pharmaceutical industries. McCarthy declared that boosting revenue is a non-starter. “I don’t think it’s a revenue problem. It’s a spending problem,” McCarthy said. McCarthy said both he and Biden directed their negotiators, to “work through the night” on Monday as they race toward a deal before June 1, when the Treasury Department warns the federal government could run out of money.It was not immediately clear when talks would continue on Tuesday, with McCarthy telling reporters on Monday that he expected to talk with Biden daily at least by telephone. COMMON GROUND Unless Congress raises the debt ceiling and allows the federal government to borrow money to pay its bills, the United States could default on its obligations for the first time in history, potentially tipping the nation into recession and plunging global financial markets into chaos. Any deal to raise the limit must pass both chambers of Congress, and therefore hinges on bipartisan support. McCarthy’s Republicans control the House 222-213, while Biden’s Democrats hold the Senate 51-49.Despite the gridlock, the two sides have found some common ground on several areas, including permit reform that will help energy projects move forward.McCarthy on Monday said including some permitting reforms in the debt deal would not solve all of the related issues and that talks on further reforms could continue later, declining to address transmission for renewable energy.The two sides are also discussing clawing back unused COVID relief funds and imposing stricter work requirements on two popular public benefit programs aimed at helping Americans out of poverty. But leaders cautioned that nothing has yet to be agreed upon. “No one’s going to agree to anything until we have a finalized deal,” said Republican Representative Patrick McHenry, who chairs the House Finance Committee. More

LONDON (Reuters) -Bank of England Governor Andrew Bailey said on Tuesday the British central bank had “very big lessons to learn”, with inflation still in double digits and food prices rising at the fastest rate since the 1970s.Bailey and other top BoE officials faced two hours of often harsh criticism from lawmakers during a question-and-answer session in parliament about the central bank’s failure to forecast the scale of inflation’s jump. “I think there are very big lessons about how we operate monetary policy in the face of very big shocks,” Bailey said.Britain’s inflation rate in March was the highest in Western Europe at 10.1%, putting the BoE under intense political scrutiny. Critics have accused it of being slow to react and being out of touch with struggling households.Harriett Baldwin, the chair of parliament’s Treasury Committee, told Bailey that the central bank had failed to respond quickly enough to warnings from food producers that costs were rising sharply.”Something has really gone wrong with your modelling and your network of agents which is meant to give you this edge in terms of information,” Baldwin said.Bailey said the BoE’s market contacts were told in February that food inflation had likely peaked, but that turned out not to be correct, with weather events in other parts of the world affecting crops such as sugar.He said food producers may also have locked in higher costs than the BoE had anticipated, something he conceded should have been picked up by the central bank.Earlier on Tuesday, the Office for National Statistics said British food inflation – at 19.1% in March – was the second-highest among Group of Seven countries, behind only Germany.John Baron, another lawmaker on the committee, accused the central bank of a “woeful neglect of duty” which had caused “real pain out there with people and with businesses.”Bailey responded by saying the shocks faced by the economy had been unprecedented. “We have to make policy in real time. We don’t make policy with the benefit of hindsight. We have had to respond to shocks as they occurred,” he said.BoE Chief Economist Huw Pill said the central bank’s forecasting models were based on the experiences of 30 years of inflation-targeting which had been successful until recently.”That’s a period where we haven’t been exposed to shocks of the magnitude that we have seen,” he said.The BoE has raised interest rates repeatedly since December 2021, from 0.1% to 4.5% today. Financial markets fully price in further increases to 5% by the end of 2023.”I can’t tell you whether we’re near to the peak, I can’t tell you whether we are at the peak. I think we are nearer to the peak than we were,” Bailey said.Data on Wednesday is expected to show Britain’s consumer price index fell back to 8.2% in April but that would still be more than four times the BoE’s 2% target.Prime Minister Rishi Sunak has promised to halve inflation this year as he tries to tackle the big lead of the opposition Labour Party before an election expected in 2024.Last month, union bosses and tabloid newspapers criticised Pill for saying that the country needed to accept it was poorer because of shocks like the energy price surge sparked by Russia’s invasion of Ukraine.Earlier this month, Bailey said Pill’s wording was wrong.”We do have a challenge – I will be honest with you – in how we communicate,” Bailey said of the BoE’s attempts to convey the outlook for interest rates.In his annual report to parliament, Bailey repeated the BoE’s existing language that further interest rate increases would be required if evidence of more persistent inflation pressures appeared. More

LONDON (Reuters) -The International Monetary Fund no longer expects a recession in Britain this year, it said on Tuesday, praising steps taken by the government to stabilise the economy and fight inflation and warning against pre-election tax cuts. The IMF said gross domestic product now looks set to grow by 0.4% in 2023 rather than contracting by 0.3% as it had predicted in April. The earlier forecast was the weakest for any major economy this year but the new growth projection would see Britain edge ahead of some rich world peers including Germany. While the IMF warned the outlook remains subdued, it said Prime Minister Rishi Sunak’s government was on the right track, in contrast to its concerns about the direction of economic policy under former premier Liz Truss. “The UK authorities have taken decisive and responsible steps in recent months,” IMF Managing Director Kristalina Georgieva told a press conference on Tuesday.”What we see is that the government is prioritising, and rightly so, the fight against inflation.”Sunak and finance minister Jeremy Hunt took over in October, after Truss’s brief term sowed chaos in financial markets.The IMF said Britain’s improved outlook reflected the unexpected resilience of demand, helped in part by faster than usual pay growth, higher government spending and improved business confidence.The fall in energy costs after sharp rises last year and the normalisation of global supply chains also helped, it said.Georgieva said the current government’s prioritisation of fiscal prudence was admirable, and warned Hunt against allowing budget policy to be overtaken by political priorities. “Of course it is attractive to look into ways in which the tax burden is lighter, to inject more investment opportunity, but only when it is affordable,” Georgieva said. “And at this point of time, neither is it affordable, nor is it desirable.”With the opposition Labour party far ahead in opinion polls, Hunt is likely to come under increasing pressure from within his Conservative Party to cut taxes in time for an election expected in late 2024. FALLING INFLATION British inflation is likely to fall to around 5% by the end of this year from more than 10% in March, and should return to its 2% target by the middle of 2025, the IMF said – broadly in line with forecasts from the Bank of England earlier this month. It said the economy would grow by 1% in 2024 and 2% in the following two years, before returning to a long-run growth rate of around 1.5%. Britain’s growth potential could be improved by measures to tackle the impact of long-term illness on the labour force, and by reducing policy and regulatory uncertainty which harms business investment, the IMF added.A recently revised agreement with the European Union on post-Brexit trade involving Northern Ireland and a “more measured” approach to scrapping EU law should encourage investment, it said.The IMF said further persistence in inflation and accompanying unsustainable increases in wages were the biggest near-term threats to Britain’s economic outlook and that the BoE should ensure monetary policy remained tight.”This said, elevated uncertainty about the macroeconomic outlook and inflation persistence merits continuous review of the pace and magnitude of monetary tightening,” the IMF added.The BoE has raised borrowing costs at 12 consecutive meetings, taking rates to 4.5% this month, and financial markets see them peaking at 5% later this year. More