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UK Markets May Have Over-Reacted to Slowdown
World Economy

UK Markets May Have Over-Reacted to Slowdown

Investors may have over-reacted to signs of economic slowdown, although they have been right to price in weaker global growth prospects, the Bank of England’s chief economist said.
“What we have seen over the past week is financial markets catching up with the data,” Andrew Haldane said, according to a Reuters report.
“Possibly over-reacting to the data but certainly catching up, because I think there has been a drip, drip, drip – globally I mean – of slightly below-par news for several months.”
In a wild week for international markets prompted by fears about a recession in Europe and weaker growth globally, some readings of British government debt prices at one point implied markets expected no interest rate hike by the Bank of England at all next year.
That represented a sharp change from some recent expectations that key rates would start to rise from their record low of 0.5 percent, possibly in November.
Markets ended the week pointing to a rate hike around mid-2015 after Haldane said in a speech on Friday that kind of timing might not be a bad bet, given the slower growth outlook.
Haldane, who became the BoE’s chief economist in June, also said that the Bank needed to improve its economic forecasting after it had proved over-optimistic about how quickly Britain would recover from the financial crisis.
“We can’t afford not to have the best model that economists can develop and we are going to do that. It will happen,” he told the newspaper, saying he wanted a “more granular” way of economic forecasting that is less reliant on averages and looks more at different sectors and income groups.
That kind of system would help the BoE as it considers using tools other than interest rates to manage Britain’s economy.
He said policymakers needed to have a better grasp of changes in the global economy too. “The absence of that global financial weather map has never been more harmful.”
Another BoE policymaker sounded a gloomy note about the chances of Britain’s economy recovering fully from the financial crisis in the next few years.

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