London (MNI) – The following is the text of the key passages of
Bank of England MPC member Martin Weale’s written annual statement to
the Treasury Select Committee Tueesday.
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Report to the Treasury Select Committee
Dr Martin Weale,
27 November 2012
Voting Record
During this period there have been three distinct phases of asset
purchases. The first was to buy stg 75bn of government debt; this began
in October 2011 and was completed ahead of the February 2012 meeting.
The second began in February and was to buy stg50bn. The third, also to
buy 50bn, was agreed in July and was completed ahead of the meeting in
November 2012. I voted in favour of these rounds of asset purchases at
the meetings at which the decisions were taken, and to maintain the
stock at the relevant level at the other meetings. This meant that I
was, on each occasion, voting with the majority of the Committee. After
the asset purchases that began in February were complete, I voted, with
the majority and against further asset purchases in May and June because
I was concerned about the persistence of inflation. Despite these
continuing concerns, I nevertheless voted for further asset purchases in
July because it appeared to me that the economic situation had
deteriorated both nationally and internationally. These decisions were
the outcome of two opposing factors. I thought that underlying
inflationary pressures were somewhat stronger than those implied by the
MPC forecasts in the period from November 2011 to August 2012. But I
also took the view that, as I had said in November of last year for the
first time, asset purchases probably provided a stimulus to output and
inflation weaker than that assumed in the Banks analysis. This meant
that I thought the overall monetary stimulus provided to the economy
from our asset purchases, from the various influences such as the
Funding for Lending Scheme, and most recently from the Treasurys
decision to use the interest accrued on our asset purchases to reduce
the debt issue, were compatible with the inflation target.
The main source of my concern about inflation was the risk that
wage increases would, relative to productivity growth, be larger than
would be compatible with the inflation target. After a long period of
above-target inflation, there is always a risk that the credibility of
the inflation target will be reduced, creating a situation where it
becomes all the harder and more costly to keep inflation close to
target. Nevertheless, I had initially expected a stronger productivity
performance and faster wage growth than we have seen over the last year.
Offsetting these concerns about inflation, the economy was also
subject to substantial contractionary pressures and especially those
arising from the effects of the crisis in the euro area. This had a
number of influences. First of all, it directly reduced the demand for
British goods in our largest export market. Secondly, it added to the
general sense of uncertainty, and was probably a factor directly
depressing investment and consumption spending. Thirdly, it pushed up
bank funding costs, leading to higher interest rates to bank customers
and a reduced willingness of banks to lend, affecting both households
and firms. This background made policy action by the Bank desirable and
it was with this in mind that I thought it right to support our asset
purchase programmes. Starting in the summer, bank funding conditions
have improved, helped by both improved market conditions in the euro
area and the Banks Funding for Lending Scheme (FLS), but the
improvement has not been so marked as to justify any reversal of the
policy stance.
The Current State of the Economy
The November Inflation Report broadly represents my view of the
growth prospects of the economy with a gradual move towards more normal
economic growth. In the current quarter I would not be surprised if real
GDP fails to grow, or contracts somewhat. Looking into next year, the
positive sign from the lower cost of bank funding, combined with the
fact that the FLS provides a strong incentive for banks to expand their
lending, points to some improvement. The impetus from this may then
trigger a gradual revival in investment with further support coming from
an improved international situation. But associated with the economic
stagnation has been an unparalleled period of stagnant or falling
productivity and more normal growth will not be possible without a
return to productivity growth. There has to be some risk that the recent
economic stagnation will continue.
The weak productivity performance is probably accounted for by a
number of different factors. One influence may be that, although
employment has been rising strongly, the labour market is nevertheless
not offering the same opportunities for career advancement as before.
Other contributions come from the fact that investment has been weak and
the North Sea oil production has been declining. It is also possible
that low rates of interest, compared to previous recessions, have meant
that inefficient firms have been able to carry on operating, while, at
the same time, a limited supply of credit has made it difficult for new
businesses to establish themselves and expand. Some of these factors,
but not all of them, should abate if demand starts to expand. But it is
not possible to be confident as to how far an increase in demand will be
matched by a corresponding increase in supply and how far it will add to
inflationary pressures. The resilience of inflation while the economy
has been so weak has proven to be a major challenge. While inflation may
rise further in the near term, under the influence of increased prices
of domestic energy, in the medium term I expect to see a drift back
towards the target. It is, nevertheless, more likely than not to remain
above target for much of the next two years. The reality is that there
is a range of what might be termed administered prices, which may not be
very sensitive to the balance between supply and demand. If these
continue to rise at above the target rate of inflation, then other
prices have to rise less rapidly for the target to be met. In turn this
creates a risk that policy will need to be tighter than would otherwise
be the case.
Activities
During the course of the year I have wanted to explain my
continuing fears about inflation and also to communicate my views on
quantitative easing
–London Bureau; Tel: +442078627499; email: ukeditorial@marketnews.com
[TOPICS: MT$$$$,M$$BE$]