London (MNI) – Bank of England Monetary Policy Committee member
Martin Weale warned Wednesday that rising import and oil prices could
lead to stronger than expected inflation, and also said it made sense to
hike the Bank Rate before unwinding quantitative easing.

In a question and answer session Weale, who in his speech earlier
did not think it was likely he would see the case for more quantitative
easing when this round ends, said oil price hikes would hit activity but
the MPC had to focus on inflation.

“If people find themselves poorer because oil prices do rise more
than is expected, and that is one of the things that could happen, then
people will find they have less money to spend and real incomes will be
even lower than I suggested and that will have a depressing effect on
activity,” Weale said.

“But, of course, what I have to remember as a monetary policy maker
is that our target is the inflation rate, or it’s the future inflation
rate – it’s not the state of economic activity,” he added.

“So what we would typically do in that set of circumstances is to
think about what the oil price would imply for future inflation after
taking account of the dampening effects it has on demand,” he said.

He was asked about the rising commodity prices and the impact of
emerging economies.

“One of the things we have noticed is import prices have been
rising more than one might have expected and a component of that is
inflation from developing economies. And obviously if that sort of
process goes on and no offsetting adjustment takes place it could turn
into one reason why inflation might be higher than we think,” Weale
said.

He firmly rejected the idea the MPC should have a growth target
alongside its inflation target.

“Would it be a good idea to go easy on the inflation target, to pay
less attention to the inflation target so the economy could grow faster?
My answer is no, I don’t think it would be a good idea because I have
a very clear memory of the sort of situation you can get into in that
sort of circumstance.

“When you get back to 1970s type inflation all you end up with is
more and more inflation and the growth rate stops responding and you
then find you need a rather substantial squeeze to bring inflation
down,” Weale said.

He also flatly rejected the idea QE could boost inflation without
boosting growth.

“I would find it very odd that quantitative easing could be
expected to have an effect on inflation and no effect on demand on the
way there,” he said.

In his speech, Weale said it was perfectly possible Bank Rate would
be hiked before markets expect. In the Q&A, he said a rate hike could
precede QE unwind.

“If you think back to this time last year – at that stage, the euro
area crisis hadn’t happened, at that stage I was actually voting for an
increase in interest rates because I was concerned about inflationary
pressure and for those of us who were concerned it seemed more sensible
to think of an increase in interest rates than it did of trying to set
in motion unwinding some of the asset holdings.”

–London Bureau: +20 7862 7491; drobinson@marketnews.com;

[TOPICS: M$$BE$]