LONDON – New Bank of England Monetary Policy Committee member
Martin Weale will face the Treasury Select Committee Tuesday, and it
will be a big surprise if his evidence sounds anything other than
dovish.

Weale, in recent comments, has highlighted downside growth risks to
the UK economy and he is untroubled by relatively high inflation
expectations – unless they start feeding through to higher pay
settlements.

Weale, a former director of the National Institute of Economic and
Social Research, is a well known commentator on the UK economy. He
expects a rocky recovery for the UK, and has little sympathy for the
view policymakers should react to moves up in inflation expectations.

In his first interview since joining the MPC in August, Weale told
The Times he was “very comfortable” with the central forecast in the
BOE’s August Inflation Report.

That showed headline CPI inflation staying above the BOE’s 2.0%
target on flat and market rates until Q4 2011, before heading well below
it. On market rates it was shown falling to 1.32% two years ahead and
1.56% three years out, and 1.56% two years out on flat rates.

“I am very comfortable with the view that there is slack in the
economy, that unemployment is likely to rise further and, the way things
are developing, I find it hard to see that there are unusually
substantial upside risks to inflation so I feel very comfortable with
the inflation forecast in the Inflation Report,” Weale told the Times.

Weale, who voted for no change at the August meeting, welcomed the
downgrading of the BOE’s growth forecasts in the August Inflation
Report.

“I am much more comfortable with the sort of growth that was in the
Inflation Report forecast, than I had been (with) the earlier ones,”
Weale said.

In comments to Market News just ahead of the announcement of his
MPC appointment Weale expressed skepticism over his colleague Adam
Posen’s view that a rise in inflation expectations has been a key factor
in higher UK inflation outturns.

Weale said if the rise in inflation expectations was feeding
through to actual inflation outturns then the most likely route would be
through higher wages and “wage increases have been pretty modest.”

He said if inflation expectations are not feeding through into
wages, the only other way they can impact the real economy is through
prices. While there is a lengthy academic literature on sticky prices
Weale said he found much of it unpersuasive.

“Prices are much more flexible than wages,” he told Market News.

It was a theme he returned to in his Times interview, when asked
about inflation expectations.

“I wouldn’t be seriously alarmed unless there were evidence that
wage growth had started to pick up, because it seems rather unlikely
that you can have something driven by prices with nothing happening to
wages,” he said.

Since Weale’s Times interview, the purchasing managers surveys have
shown growth slowing markedly in August and the evidence is mounting
that Q3 growth will be well below Q2 levels.

While Weale is likely to endorse unchanged policy, he can see
arguments for further easing as well as tightening.

“Am I in favour of greater loosening or tightening? The situation
is very expansionary and even with some slight tightening it will still
be very expansionary. For the time being I can see arguments for both
tightening and loosening and I am comfortable with the position the way
it is,” Weale said.

Weale will start giving evidence to the TSC at 1000 GMT Tuesday.

-London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

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