London (MNI) – The following is the full text of the policy section
of Bank of England Monetary Policy Committee member Martin Weale’s
annual report to the Treasury Select Committee.

Voting Record

Between joining the Committee for its meeting in August 2010 and
December of the same year, I voted for no change in either asset
purchases or in Bank Rate. Late last year, I became increasingly
concerned about the rising rate of inflation and the implications of
this for the Committee’s ability to deliver its target. In January I
therefore voted for a quarter point increase in Bank Rate.

A substantial part of the rise in inflation in January of this year
was due to the increase in VAT announced in last years budget. I felt
comfortable with the principle that, because the effect of this would
drop out of the inflation rate after about twelve months it would not be
appropriate for policy to adjust in direct response to this. There was
nevertheless a risk that the resulting increase in prices would have
knock-on effects to wage demands; Britains past history suggested that
this risk was a very real one.

Inflation was also elevated because of rising commodity prices and
as a result of continuing upward pressure in the aftermath of sterlings
depreciation in 2008 and there was a risk that these influences could
also have knock-on effects on wages. There is always considerable
uncertainty about the future path of commodity prices and also about the
full extent one might expect prices to rise in the aftermath of the
depreciation. The Committee has a target for consumer prices and not for
domestic costs. This means that it should attempt to offset continuing
effects of such influences on the inflation rate. At the same time it
does not have an effective means of offsetting the short-term
consequences of such movements.

There were two factors which lay behind my vote. First of all, the
Inflation Reports produced in February and May showed that, if interest
rates followed the profile implied by the profile of term interest rates
in the money markets, then inflation was expected to be above its target
at the two to three year horizon at which the Committee aims to bring
the inflation rate to its target. To me, this pointed to a need for a
Bank Rate path higher than the market was then expecting.

Secondly, even if the market profile had been adequate to bring
inflation to target over a two to three year horizon, it seemed to me
that there were benefits in increasing Bank Rate earlier rather than
later. An earlier tightening would reduce the need for tightening later
on. And it would give extra benefits in terms of credibility at a time
when the Committees reputation was affected by rising inflation.

The economy was weaker in the first half of this year than I had
hoped, and by the summer my concerns about developments in the euro area
had increased. At the same time weakening commodity prices meant that
some of sources of inflationary pressure which had worried me were less
acute. Putting these factors together and bearing in mind, in
particular, the risk of an intensifying financial crisis, I voted for no
change in policy in August and September.

Had Bank Rate been increased earlier in the year I would have voted
to reduce it.

By October it was clear that the crisis in the euro area was having
more marked effects on activity at home and I therefore joined my
colleagues in voting for an additional Stg75bn of asset purchases. In
November I voted to maintain the asset purchase programme on that scale.

The Outlook for the UK Economy and Inflation

The short-term outlook for the economy is that little growth can be
expected either in the current quarter or in the first half of next
year. Beyond this, while the outlook is as always uncertain, there is no
reason to expect growth at rate below the historical trend. In the long
term growth may resume at its trend rate or perhaps somewhat faster. The
major source of short-term uncertainty the economy faces stems from the
continuing crisis in the euro area.

It is clear that the current situation cannot continue
indefinitely. But there are a number of different ways in which it could
be resolved. Some would be highly disruptive to the international
economy and others less so.

It is possible that the removal of the current uncertainty,
following an orderly resolution of the crisis, would be a positive
rather than a negative shock to the economy. I mentioned above the
inflationary risks which concerned me earlier in the year and it is
clear that at least some of these have not materialised. With commodity
prices having stabilised and the VAT rate dropping out of the
calculation, the rate of inflation must be expected to fall fairly
sharply in the first part of next year.

Weak economic growth is likely to exert its own additional
influence in bringing down inflation. On the face of it there is a
strong case for further asset purchases. Increasing the rate at which
the Bank makes asset purchases runs the risk of disrupting the smooth
running of the gilts market. But if neither economic prospects improve
sharply nor inflation prospects worsen, relative to the way they appear
at the moment, then I think there will be a strong case for extending
the asset purchase scheme when the current purchases of Stg75bn have
been completed and when it is clear that inflation is falling as we have
forecast.

[TOPICS: M$$BE$]