Don't blame me!

To nobody's surprise, the Bank of England's latest inflation forecast includes drastically lower growth projections, accompanied as always by an expression of confidence that inflation will soon fall much closer to the Bank's 2% target. Both in the report itself and in Governor Sir Mervyn King's remarks to the press, there's even more uncertainty than usual about the outlook for the UK economy. But there's one thing that Sir Merv is adamant about: whatever you don't like, whether it's slow growth or high inflation, it's NOT HIS FAULT!

That denial of responsibility even applies to the past. In the Bank's interpretation, the slow growth the economy has endured over the past year or so is a result of the squeeze on real household incomes. However, in his remarks at the media conference when the report was released, King was quick to deflect the blame:

"Real take-home pay should gradually begin to recover after a period in which prices have grown faster than wages. It would be wrong, though, to think that monetary policy was the reason for the sharp squeeze in real take-home pay. Instead the squeeze was an unavoidable consequence of movements in world energy and other commodity prices, the need to rebalance the UK economy, and the cost of the financial crisis in terms of lower productivity. Indeed, lower inflation would have been possible only with lower nominal pay growth and higher unemployment".

Just about everyone but the Bank is to blame, then, because "the need to rebalance the economy" is just code for "government cutbacks" -- and we all know how well that's working, with the Treasury quietly admitting that cumulative borrowing for 2010-2014 will be £100 billion higher than was projected in the budget. Leaving that aside, however, it remains difficult to accept that the Bank is blameless. UK inflation has been significantly higher than in the Eurozone, which is equally exposed to world commodity prices. Is Gov. King really saying that divergence has nothing to do with historically low interest rates, quantitative easing and the weakness in Sterling? Meanwhile UK growth has generally lagged behind not only that of larger Eurozone economies, notably Germany, but also that achieved by the United States, so the Bank can't even convincingly claim that it has accepted a bit more inflation in order to achieve higher growth. (Yes, I am aware you can't prove a counterfactual).

Looking forward, the Bank blames its downgrading of growth prospects for 2012 on the Eurozone crisis:

"The outlook for output growth is unusually uncertain. That reflects in particular the exposure of the UK economy to developments in the euro area. The euro area faces substantial challenges as several members seek to ensure the sustainability of their public and external debt and maintain financial stability. Implementation of a credible and effective policy response in the euro area would diminish uncertainty and so support the UK recovery. Even in this case, however, the scale of the imbalances means that there is likely to be a prolonged period of subdued growth within the euro area. But a failure to meet these challenges would almost certainly have significant implications for the UK economy."

Politicians from George Osborne to Barack Obama are eagerly shovelling all the blame for the world's ills in the direction of the poor old Eurozone, so King is unlikely to find much dissent about playing everyone's favourite get out of jail card. The big question is, what is the Bank planning to do about it? Most commentators seem to feel that the Bank is leaving the way wide open for yet more quantitative easing, despite the lack of clear evidence that this policy has had much impact on growth up until now. That media consensus may well prove to be accurate, but the Bank will need to be careful. For the first time in at least three years, the Bank's stale forecast of sharply falling inflation stands a reasonable chance of coming true. It will not want to risk reigniting inflation expectations with another bout of unproductive money printing.

When Chancellor Gordon Brown gave the Bank of England full independence back in 1997, the move was widely welcomed. Widely, but not universally. One dissenter was one of Brown's predecessors at the Treasury, Ken Clarke, who always felt it was a mistake to rob the government of the day of any overt role in setting monetary policy. Even now, Clarke's view would find very few adherents, but it's hard not to feel that the UK economy might be faring better with a slightly tighter monetary policy and slightly less fiscal retrenchment. That's just another of those counterfactuals that we'll never be able to prove.