–Says Recognised Need For Stimulus At June Meeting
–Wanted To See Results Of Tsy Lending Talks Before Deciding On QE

LONDON (MNI) – Easing inflation pressures open up “appreciably”
more room for further monetary stimulus, Bank of England Monetary Policy
Committee Member Martin Weale has said.

The Bank of England’s Monetary Policy Committee will take into
account cash injected by the new repo auctions as well as the ‘funding
for lending’ scheme agreed with the UK Treasury, Weale indicated.

In a speech tonight, Weale says that he was ready to back more
monetary stimulus at the early June MPC meeting but had wanted to wait
and see the outcome of the talks between the Treasury and BOE on a
scheme to ease SMEs’ access to credit.

“While I shared the view that further monetary stimulus could be
applied to the economy without putting the inflation target at risk, I
wanted to wait for the outcome of these discussions before I felt able
to come to a view on the appropriate stimulus”.

“Pound for pound,” the new repo auctions and the lending plan would
do more for the economy than further QE.

“…We have to recognise that the distinction between monetary
policy, fiscal policy, regulatory policy and macro-prudential policy is
no longer clear-cut. Both the ECTR and Funding for Lending affect the
balance of risks associated with banking”.

Weale said that the euro crisis had been an important factor in the
recent economic weakness seen in the UK. The Greek election had
prevented a more acute immediate crisis but the atmosphere of
uncertainty generated by the crisis no doubt explained the recent
weakness of the UK economy.

“The results of the Greek elections may have prevented an immediate
acute crisis. But I am still not sure how the peripheral countries of
the euro area are going to manage their debts. The enveloping crisis is
probably an important factor why economic growth has been so weak
recently”.

Weale noted recent easing in inflation pressures saying that this
opened up “appreciably more room for further monetary stimulus”.
Inflation looked set to be lower later this year than had been expected
a few months ago, thanks to easing oil and raw material prices:

“…The oil price has now fallen below $100 per barrel and prices
of other fuels have come down. This raises the prospect of inflation
later this year being lower than had seemed likely even a month ago”.

The danger of inflation becoming entrenched in expectations was now
much reduced, he said.

Weale noted that the divergence between strong survey data seen
earlier in the year and weaker official growth numbers had narrowed,
with the former

“The buoyant picture that they gave in the first quarter of the
year, both at home and abroad has now faded…the issue is not so much
that they are signalling a sharp contraction as that they are consistent
with no perceptible economic growth in the recent past and very near
future…”.

And internationally the picture had become considerably worse and
the global uncertainty was “probably also deterring spending at home”.

During his speech, Weale highlighted the high funding costs faced
by UK banks, as measured by credit default swap premia which remain
close to the elevated levels reached late last year.

“Lenders to UK banks know that these are exposed to French and
German banks. And the latter have lent heavily to banks and other
borrowers in the peripheral part of the euro area”.

The new ECTR auctions would result in a net injection of extra
cash, Weale noted, because of the suspension of reserves averaging
since the launch of QE. While “temporary and short-term” this cash
injection would still bear on the MPC’s monetary policy debate. As would
the Funding for Lending scheme:

“The Committee will also need to take account of the Funding for
Lending Scheme, a further means of reducing funding costs, as this is
developed”.

BOE Governor Mervyn King has spoken of aiming to have the scheme
being up and running ‘within weeks’ but earlier plans to boost bank
lending to businesses have met with poor results.

These last comments from Weale might imply that any move to boost
QE could be tempered by such considerations. Indeed, he suggests that
some refining of the current arrangements could be needed should there
be long-term need for the repo auctions and lending schemes to ensure
the policy independence of the MPC isn’t undermined.

But Weale also clearly stressed the priority of supporting the
economy as needed as well as protecting it from the deteriorating euro
zone crisis.

“…Any refining of current arrangements should obviously take
second place to the task of ensuring that adequate support can be
provided to the economy as it is needed, and in particular that, in the
event of the situation deteriorating in the euro area, the UK economy
can be protected as much as is possible”.

Weale’s dovish comments today suggest he could well vote for
further QE when the committee meets again in July, but the launch of the
new repo auctions as well as the new plan to ease credit conditions will
be key factors in his decision.

–London bureau: +4420 7862 7492; email: dthomas@marketnews.com

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