–Sees Case For Waiting For Clear Signs Inflation Will Fall Sharply
–Weale Says He, Others Worried Over Inflation Impact 2008 Stg Fall
LONDON (MNI) – There is a strong case for more quantitative easing,
but not until the current round is completed by February, according to
Bank of England Monetary Policy Committee member Martin Weale.
The MPC member says he can see the case for waiting for inflation
to come down, and warns that he would back policy tightening without
hesitation if the economy turns out better than the BOE expects. Weale
supports the near consensus view among analysts that the MPC is likely
to sit tight for the next couple of months before providing further
stimulus.
In the speech to the National Institute of Economic and Social
Research, where Weale is a director, he stresses that monetary policy in
itself cannot set the economy back on a sustainable growth path and it
can only partially offset the weakness in demand in the wake of the
financial crisis.
The BOE’s November Inflation Report showed CPI falling from 4.7% in
the fourth of this year back below its 2.0% target by Q4 next year to
just under 1.3% two years ahead.
“The Committee’s recent forecast suggests that, as a
result of weakness over the next three quarters, inflation is more
likely than not to undershoot its target at a two to three year
horizon,” Weale says.
“It is fair to say that this, in turn, suggests a strong case for
further support once our current programme of asset purchases is
complete,” he adds.
The Stg75 billion of asset purchases sanctioned by the MPC at its
October meeting are set to be completed over four months, stretching the
QE round out to February when the MPC will undertake its next quarterly
forecast round.
BOE Governor Mervyn King said after the November Inflation Report
that one reason for delaying further stimulus was waiting to see if
inflation did fall back sharply as the MPC is forecasting.
“I can understand the case for waiting until the marked reduction
in inflation which we are predicting is clearly underway,” Weale says.
Weale voted for a hike in Bank Rate as recently as July, before
backing the relaunch of QE in October.
“Should the situation improve to the extent that I think some
tightening is needed to deliver the inflation target, then I shall not
hesitate to vote for that tightening,” he says.
In his speech, Weale addresses a hot topic among policymakers and
economists at present – whether the UK has suffered more than temporary
damage to potential productivity. He argues that productivity growth,
currently near flat on some estimates, will return back to something
like its long term rate.
“I share the general view of the Committee that something close to
normal productivity growth … will resume in the near future,” he says.
“Nevertheless, it is unlikely that there will be a rapid return to
the sort of path we might have followed in the absence of the crisis.
For this reason none of us are advocating an attempt to make up more
than a part of the short-fall in demand relative to the pre-crisis
trend,” he adds.
Weale highlights the limitations of monetary policy, saying the
MPC has no instrument to tackle the imbalances that have haunted the UK
economy, and QE may actually exacerbate the problem of the country’s
tendency to excessively high consumption.
“Past levels of consumption were too high in the absolute sense
…. Far from helping to correct this imbalance, policies, such as asset
purchases, which support current consumption, probably worsen it,” he
says.
In passing Weale also notes that, following QE, yields on gilts
have fallen to post World War 2 lows, making it worthwhile for the
taxpayer to redeem historic debt.
“With the price of 4% Consols above par and the price of 3.5% War
Stock (popularly War Loan) only just below par, it is hard not to wonder
whether these venerable stocks will themselves be casualties of our
current circumstances. Both of them are now callable and once their
prices pass par it is in the tax-payer’s interest for them to be
converted or redeemed,” he says.
Weale also vented a degree of angst over the impact of the 2008
fall in sterling.
“Over the past few months I and others have worried about the
inflationary impact of the aftermath of the exchange rate movement of
2008. Work in the Bank suggests that we have now seen most of the
effects of the rebalancing following on from that depreciation. But the
economy is still running an external deficit, albeit smaller than before
the crisis”.
–London Bureau +20 7862 7491; drobinson@marketnews.com
[TOPICS: MT$$$$,M$$BE$]
