LONDON (MNI) – More asset purchases would become the appropriate
policy if inflation pressures weaken substantially further, Bank of
England Monetary Policy Committee Member Martin Weale said today.

“Substantial further weakening of inflationary pressures would, of
course, mean that additional monetary support rather than a withdrawal
of that support would be the appropriate policy,” Weale said in a speech
in Doncaster today.

He went on to point out that it is “unlikely there is practical
scope for a further reduction” in Bank Rate.

“On the other hand, the Bank does have the option to buy more
government debt, reducing longer term interest rates,” Weale continued.

That said, Weale made clear that neither the recent August
Inflation Report from the BOE nor more recent developments “as yet
make a case for such a policy” (i.e. more QE).

“I do not think our August forecast or the more recent market
movements since then as yet make a case for such a policy…although the
economy is weaker than we would like, business surveys do not suggest
the picture is, at present, like that of the summer of 2008″.

The CBI survey of manufacturers pointed to some improvement in
August, he noted.

While Gilt yields at the short- and medium-end of the curve – are
at record lows – at the long end yields are still above levels seen in
the mid 20th century, Weale said, pointing to scope there for more
official asset purchases if needed.

“…the yield on Consols remains above 4% while long-dated stocks
are paying more than 3.5%. These are well above the levels reached in
the middle of the last century; there is undoubtedly scope for further
asset purchases to trigger further reductions in yields on government
debt should the need arise”.

Such asset purchases and ensuing yield reductions would help
boost consumption and business investment, Weale said.

Weale also noted that the price of oil had fallen by 8% since the
MPC meeting at the start of August, which would do more to quell
inflation pressures than a hike in rates would have done.

This pointed to lower inflation further out and reduced the risk of
second round effects, he said. The fall in oil prices would take 0.2pp
off the Consumer Price Index and a further 0.2pp if the fall persisted
and fed into utility bills.

“They could point both to inflation lower than I had feared next
year and to a substantially reduced risk of the sort of second-round
effects on wages which have so concerned me over the last few months.”

Weale had supported a rise in Bank Rate at the July meeting of the
MPC but changed his mind at the August meeting and backed no change in
policy. His change of view appears to have been driven by the changed
outlook for inflation as result of the risks posed by the worsening euro
zone crisis and slowing global growth.

–London bureau: +4420 7862 7492; email: dthomas@marketnews.com

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