MNI POLICY: BOE Braces For Trump Impact Without Scenarios
MNI (LONDON) - Just months after committing to produce alternative economic scenarios in order to make its monetary policy reasoning clearer, the Bank of England is lagging private forecasters as it wrestles with the problem of how to incorporate the significant but uncertain implications of U.S. President-elect Donald Trump’s incoming government into its projections.
While the review of its forecasting and communications carried out by former Fed chair Ben Bernanke concluded earlier this year with a recommendation that the BOE address economic uncertainty by sketching out alternative scenarios, the Bank traditionally shies away from political speculation. This means that while private economists are already trying to anticipate the implications for global activity and prices of potential large increases in U.S. tariffs and fiscal easing in particular, the BOE included no Trump scenario in its November Monetary Policy Report and appears to be in no rush to provide one either.
In comments to parliament’s Treasury Select Committee on Tuesday, BOE Governor Andrew Bailey said it would be unwise to try to guess what Trump will do, as well as how other countries might react to increased U.S. tariffs. (See MNI INTERVIEW2: Trump Stagflationary For Eurozone-ECB's Wunsch)
But this does not mean that Monetary Policy Committee members did not discuss their potential impact in their November meeting, independent MPC member Megan Greene told MNI at a recent European Institute at the LSE event.
“In our forecasting process we include what's been legislated on, rather than speculating on what's coming. And I think that is a cost worth paying for central bank independence,” Greene said.
While the MPC didn't include a scenario on Trump tariffs “that doesn't mean we didn't discuss what might happen, potential spillovers to the economy,” she said, noting the reference in the meeting’s minutes to risks from trade fragmentation.
National Institute of Economic and Social Research modelling suggested that U.S. tariffs of 10% across the board and 60% on China would deliver a cumulative 2.7% hit to UK GDP over three years. (See MNI INTERVIEW: BOE Too Reliant On Output Gap, Ducks Trump)
MARKET CURVES
One option for the Bank would be to try and capture the likely effects of geopolitical risks such as Trump tariffss in its central projection, based on market rate curves and other asset prices which shift in anticipation of future events. This approach, however, risks inconsistencies if the implied judgements on likely U.S. GDP and UK weighted GDP growth are out of line with those of government policymakers. (See MNI INTERVIEW: Fed Could Pause As Prices Spike in 2025-Gagnon)
Lagging private forecasters in anticipating political risk is a price worth paying by central banks in return for independence, Greene told MNI.
The BOE conditioned its August forecasts on the fiscal policy of the previous Conservative administration, only updating them in November once Labour’s first budget had provided an official update.
The MPC’s gradual approach to introducing Bernanke Review reforms to its forecasting processes and policy communication is making comparisons between forecasts from quarter-to-quarter trickier in other ways as well. (See MNI POLICY: Time Needed For BOE To Make Bernanke Changes)
In August, it set out three alternative scenarios, while adding a sizeable skew towards upside prices risks. In November, this upward skew disappeared, and it made clear that its central scenario was closest to the second of the same three alternative scenarios.
The removal of the skew may have partially reflected a view on the MPC that the risks of more persistent inflation had receded, but it also appears to reflect the gradual implementation of Bernanke reforms. The former Fed chief had been dismissive of using a skew to communicate policy, saying it has little grounding in quantitative analysis and conveys “a false sense of precision.”