The Bank of England has admitted that it could not have predicted the depth of the recession because of shortcomings in the data it uses and the unpredictability of banking crisis.
In a speech to a Royal Statistical Society conference last week, deputy governor for monetary policy Charles Bean said the BoE monetary policy committee relies on figures from the Office of National Statistics which offer only a limited picture.
He said: “That is the absolute bedrock on which our analysis and policy rests but the picture they provide is rarely perfect.”
He said: “One would need to be endowed with perfect foresight to have been able to predict how the financial crisis would unfold, spilling over from one institution to another, from one market to another.”
Bean said that despite using other, less precise, information to complement the ONS data, the MPC, like other forecasters, failed to see the size of the “great contraction”.
He said: “That is as it should be – deviations of outturns from central mean forecasts should be unpredictable if those forecasters are using the information that is available to them efficiently.”
Bean said the MPC does not look at probabilities associated with unlikely events but if it did it would have put the chances of a contraction of the kind which occurred during the economic crisis as “virtually negligible”.
Forecasters should not expect to be able to predict the timing and scale of crises that arise in the financial markets, he said, but should view their role as similar to that of a seismologist.
He said: “It is impossible to predict the day and magnitude of a shock with any precision, but it may be possible to say something about the likelihood of an earthquake occurring within a given period from seismic measurements and indicators of latent stress.”