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How did the Bank of England get it so wrong?

This week will see Mervyn King write again to the Chancellor of the Exchequer to explain why UK inflation is currently 3.2% against the 2% limit which the Bank of England introduced sometime ago. Many are now starting to question the quality of forecasts from the Bank of England and wondering how the Bank got it so wrong regarding the UK economy and inflation.

The truth is that the Bank of England is very much closer to the UK economy than any other party in the world. If the Bank of England is unable to forecast the future direction of the UK economy and inflation with the information to hand then effectively every other economist in the UK and around the world is very much in the dark. The problem at the moment is the fact that we have never had a credit crunch since the 1930s and there are very few people in the business or economic arena you have any experience in this particular field.

As a consequence, everybody is actually learning as they go along with regards to the long-term impact of the credit crunch and resulting worldwide recession although some may call it a depression.

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