–Weale Open To Alternative Measures To QE To Boost Economy If Needed
LONDON – Bank of England Monetary Policy Committee newcomer
Martin Weale has gone straight into the MPC mainstream, saying he is
comfortable with both the committee’s central forecast that inflation
will fall back and with its current policy settings.
Weale’s comments to the Treasury Select Committee Tuesday show him
in no rush to end the MPC’s lengthy policy pause. While saying QE was an
“obvious” policy measure if the economy does turn out weaker than
expected, he also left the door open to alternative measures to tackle
areas of weakness, such as credit supply.
Weale showed little sympathy with the arguments put forward for
policy tightening. He is pessimistic about the chances of a strong
economic recovery and does not believe the MPC should be overly
concerned about above target inflation expectations, as they is no
sign that these are feeding through to rapid wage growth.
Weale voted for no policy change at the August meeting, and his
comments suggest very strongly he did so again at the September meeting.
He could endorse more quantitative easing, or alternative stimulus
measures, but only if the economy takes a clear turn for the worse.
“I have not had a strong view that policy at the moment is either
too tight or too loose. I think the economy is recovering. That recovery
is likely to be fitful, but I am comfortable with the policy setting
that we have,” Weale told the TSC.
Asked whether more QE would be appropriate if there is a downturn,
Weale said “If things were to weaken sharply then I think monetary
policy should be the first line of defense.”
He said while QE is the “obvious” policy tool there may be a wider
range of policies, on the boundary between monetary and fiscal policy,
that could be used in the event that the situation worsens sharply.
One area where QE has appears to have been ineffective is in
boosting bank lending to SMEs.
Asked about the problem SMEs are reporting in obtaining funding
Weale responded that “quite probably there are some businesses who are
having problems accessing credit and we should have plans in place in
case there is a sharply worsening situation.”
Just what those plans should be, and whether they would be a matter
for the Treasury, the BOE, or both, remains unclear.
On the big economic picture, Weale seems in tune with the BOE’s
central forecasts.
The BOE’s August Inflation Report showed inflation above its 2.0%
target on flat and market interest rates through the fourth quarter of
next year, before falling back below, and staying below it on market
rates all the way until the end of the forecast in Q3 2013.
“I’m very comfortable with the forecasts in the Inflation Report,”
Weale said.
Weale’s views seem a long way from those of his colleague, Andrew
Sentance who, seeing evidence of a fairly robust recovery and troubled
by current high inflation outturns, voted for a rate hike at the June,
July, August meetings, and presumably in September.
At his most recent TSC appearance Sentance said – “the UK economy
has turned round and measures of nominal demand have picked up
particularly strongly” with robust Q2 GDP growth confirming “evidence
that has been coming at us from business surveys and other sources for
some time.”
Weale is much more downbeat about the recovery.
There “may be a slower recovery path than some people had hoped” he
said, and there are reasons to believe unemployment could rise further.
Both Sentance, and BOE Chief Economist Spencer Dale, have raised
concerns about inflation expectations, which continue to show people
expect it to remain clearly above the 2.0% target. Weale, however, is
relaxed about the expectation outturns.
Dale said in an interview with the Independent newspaper that,
after inflation had come in above target for 41 of the previous 50
months “we can come up with all sorts of clever and real reasons to
explain our view, but at some point people will say that inflation just
seems higher than it used to be, and that is a very substantial risk”.
Sentance said the risk was above target inflation expectations
would “begin to feed through into some of the underlying processes that
drive inflation in the future, including wage increases.”
Weale denied inflation expectations have become “de-anchored” from
the 2.0% target and sees no evidence of them feeding through to
accelerating wage growth.
“The evidence I’ve seen does not suggest inflation expectations
have become de-anchored. The MPC does look at this and it’s not the
picture we’re seeing in the data. If inflation expectations were
becoming de-anchored, I’d expect to see the effects of that in wage
bargaining and I’m not seeing that at the moment,” he said.
In comments before his appointment to the TSC to Market News, Weale
was critical of his colleague Adam Posen’s view that the rise in
inflation expectations had been a key factor in higher UK inflation
outturns.
Weale said if inflation expectations are not feeding through into
wages, the only other route through which they can impact the real
economy is prices, and he doubts this is happening.
He said he found the lengthy academic literature on sticky prices
“unpersuasive”, noting “prices are much more flexible than wages.”
For Weale, there seems to be little importance at present about
where the public thinks inflation will end up a year or longer ahead.
Weale’s appointment to the MPC ahead of the August meeting appears
to have reinforced the no change camp.
The last time the MPC sanctioned any change in policy was back in
November 2009 and analysts’ median forecast is this policy pause will go
on through the rest of this year and into the second quarter of next.
There was, unsurprisingly, little market reaction to Weale’s
comments at the TSC as they do nothing to disturb the prevailing view of
a prolonged policy pause, with more chance of further QE in the near
term than policy tightening.
–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
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