Andrew G Haldane: Twin peaks Speech by Mr Andrew G Haldane, Executive Director of the Bank of England, at the Kenilworth Chamber of Trade Business breakfast, Kenilworth, 17 October 2014. *  *  *  The views are not necessarily those of the Bank of England or the Monetary Policy Committee. I would like to thank Maria Barriel, Jeremy Franklin, Clare Macallan and Brad Speigner for assistance in preparing the text. I would also like to thank John Barrdear, Lucy Canham, Rob Elder, David Latto, Richard Harrison, Jeremy Harrison and Martin Weale for their comments and contributions. Back in June, with the cricket season in full swing, my views on the appropriate stance for UK monetary policy were evenly-weighted between the front foot (moving rates sooner) and the back foot (moving them later). With the sun shining, meteorologically and economically, the evidence leaned slightly towards a front foot stance (Haldane (2014)). Underpinning that judgement was the UK’s increasingly well-established and broadly-based economic recovery. Moving in a timely fashion to normalise rates helped avoid the risk of a hastier reaction later. In other words, it supported a limited and gradual subsequent path for interest rate rises. Three months on, with temperatures falling and the football season in full swing, how do economic prospects now look? Has the financial weather changed? How have the economic batting averages evolved? And how has the appropriate monetary stance, back or front foot, been affected? Reasons to the cheerful In many respects, the UK’s recovery remains both strong and well-balanced.

As one illustration, Charts 8 to 10 show Inflation Report forecast profiles for these three variables since 2008. These suggest that the MPC, in common with every other mainstream forecaster, has been forecasting sunshine tomorrow in every year since 2008 – that is, rising real wages, productivity and real interest rates. The heat-wave has failed to materialise. The timing of the upturn has been repeatedly put back. Downside surprises have been correlated. What is true in the UK is also true globally. In their most recent World Economic Outlook, the IMF evaluated their forecast performance since the crisis. This too points towards systematic, serially correlated, downside surprises to global growth since 2008. Of course, this is evidence from the past not the future. Are there reasons to believe these surprises might persist into the future? Financial market prices can provide some guide, in particular about the likely future path of real interest rates. Chart 11 plots how global real interest rates have evolved since 1970. It exhibits a secular downward trend which long precedes the crisis, suggesting global desired savings rates outstripped global desired investment rates. Pre-crisis explanations for this trend included a “glut” of savings in the East and “excess” consumption in the West (King (2011)). Whatever the cause, the crisis resulted in a further lurch down in global real rates, with precautionary savings rising and investment intentions falling. More strikingly still, there has been the further marked fall in global real rates during the course of this year.