–Sees Real Risk Inflation Could Rise Close To 5%
–Possible – If Activity Stays Weak Rate Hike Case Will Fade

LONDON (MNI) – Bank of England Monetary Policy Committee Member
Martin Weale believes there is still a case for policy to be tightened
and said that there were good reasons to believe that inflation will
prove higher than the BOE has forecast.

In a speech to the Institute and Faculty of Actuaries, Weale says
there are three reasons why inflationary pressures may be more marked
than the MPC central view.

With a “real risk” that inflation could rise close to 5%, Weale
asked – “can we be confident that pay bargaining and price setting will
take place on the assumption that people expect it be appreciably lower
than this in the future?”

Commodity prices could also prove more buoyant than assumed in the
BOE’s February forecasts, Weale said.

“And thirdly, there may be more upward pressure on profit margins
coming from the aftermath of sterling’s depreciation in 2008. Indeed, if
prices of traded goods are set in part in international markets, then
this is quite likely”.

Weale said that he could understand the views of some of his MPC
colleagues that inflation could prove lower than the BOE central
forecast, “But on balance I find myself more concerned about inflation
than the Committee’s collective judgement suggests and thus continue to
believe that the monetary stance should be tightened”.

Weale noted that there was a good case for not rushing to get
inflation back to target in the wake of a major economic shock and also
noted that it would be bad for the MPC to raise rates and then have to
reduce them again in a few months. But, equally, Weale stressed that it
would be bad to leave policy unchanged only to see the risk of higher
inflation materialise.

“It is perfectly possible that, if economic activity remains weak
and the risks which concern me do not materialise then the case I
currently see for higher interest rates will fade…It would be bad for
the MPC to raise the interest rate and then reduce it again after a few
months. But it would also be bad for the MPC to keep the rate unchanged
because of this risk and then find that the concerns I have do in fact
materialise”.

He added, “Rather than worry about the balance between these two
derived risks, perhaps the more important thing is to remember that our
task is to bring inflation back towards its target”.

–London newsroom: 00 44 20 7 862 7499; email:
ukeditorial@marketnews.com

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