–Adds Detail To Version Transmitted At 1053 GMT
–Monetary Policy First Line Of Defense If Economy Weakens Sharply

LONDON – The recovery could be slower than some people had
hoped and monetary policy should be used if the economy does weaken
sharply, new Bank of England Monetary Policy Committee member Martin
Weale told the Treasury Select Committee Tuesday.

Weale was asked if the thought further quantitative easing should
be employed if the economy recovers less strongly than expected. He
backed the idea of using monetary policy to deal with a further
downturn.

There “may be a slower recovery path than some people had hoped,”
Weale said.

“If things were to weaken sharply then I think monetary policy
should be the first line of defense,” he added.

Weale downplayed the chance of a rapid recovery.

“The profile of recovery from the trough of recession we have seen
recently is largely similar to the sorts of things that happened in
previous recessions,” Weale said.

Weale also warned unemployment could rise further.

While “unemployment has been much weaker than people like myself
had initially feared … I can think of reasons why unemployment should
rise further,” he said.

The new MPC member was skeptical about the ability of quantitative
easing to boost the supply of credit to small to medium sized
enterprises.

The BOE has focussed QE on gilt purchases, and has also bought
small amount of corporate bonds.

“I don’t think one could expect credit to get to the SMEs through
the bond market. Obviously, when quantitative easing was started
people didn’t know what was likely to happen because nothing on that
sort of scale had been tried before, not in the recent past,” Weale
said.

Weale said people had hoped changes in bank balance sheets as a
result of QE may encourage the banks to
lend more to SMEs.

“It is possible that route has been a bit weaker than people had
hoped,” Weale said.

Weale was asked if the fall in market interest rates was due to the
fiscal tightening unveiled by the new government.

“It is possible that it does have something to do with the fiscal
package. On the other hand, we have to remember that interest rates have
also fallen sharply in the United States and the United States shows no
sign of reducing its fiscal deficit,” Weale said.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$,MSSFX$,MT$$$$]