–In Observer Newspaper: Weale Focuses On Inflation Expectation Risk
–Weale Says If Weak GDP Growth Persists, Rate Hike Case Will Weaken

LONDON (MNI) – The risk that current elevated inflation
expectations could become entrenched made a compelling case for a modest
rise in Bank Rate, Bank of England Monetary Policy Committee member
Martin Weale said in an opinion piece published in the Observer.

The MPC member, who voted for a 25-basis-point Bank Rate hike at
the January meeting made clear, however, he would reverse his call for a
rate hike if the economic recovery halted. He noted the January MPC vote
had taken place before the shockingly weak Q4 GDP data were issued and
he said the case for a rate hike would fade if there was a sustained
economic downturn.

“The most recent GDP data shows the economy appreciably weaker than
expected. Without the effects of bad weather it is estimated output
would have stagnated late last year. This is alarming,” Weale said.

He noted all recoveries from recessions in modern times have been
uneven.

“If growth resumes shortly, my concerns about inflationary
expectations would remain. But were the recent weakness to mark the
start of a sustained new downturn, inflationary pressures would be
likely to fade without a bank rate increase,” he said.

Weale argued that it was mistaken to take comfort from the fact
much of the increase in UK inflation has been due to external factors.
With UK inflation above 3% and likely to head up above 4%, Weale warned
of high inflation expectations becoming entrenched.

“My concern is that, if businesses and pay-bargainers come to
regard an inflation rate of 3%-4% as normal, it will become more costly
for the MPC to keep inflation close to the government’s 2% target,” he
said.

While much of the inflation rise has been due, as BOE Governor
Mervyn King has stressed, to sterling’s fall and rises in commodity
prices and value added tax, Weale argued these are not necessarily one
off effects.

“The trouble is that only with hindsight can one judge how far some
of these effects are truly “one-off”. There is a risk that continuing
rapid economic development in China and elsewhere will lead to
persistent upward pressure on commodity prices,” he said.

Weale said he had seen “a powerful case for a modest rise in the
bank rate – not because it should or would reduce inflation immediately
(it would not), but because it would reduce the chance of high-inflation
expectations becoming ingrained. The costs of a small rise now would be
lower than the eventual price of addressing higher ingrained inflation.”

–London bureau: +4420 7862 7491; email: drobinson@marketnews.com

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