LONDON (MNI) – The following is a transcript of the question and
answer session Bank of England Monetary Policy Committee member Martin
Weale gave at Cass Business School on February 29.
The questions are paraphrased, and questions with no relation to
policy or the economic outlook have been removed.
Market News is making available, where possible, transcripts of
public comments by MPC members when these are not available on the BOE
website or elsewhere.
Q: Rising oil prices and their impact on inflation/consumption ?
“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.”
“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.”
“So what we would typically do in that sort of circumstance would
be to think about what the oil price would imply for future inflation
after taking account of the dampening effects that it has on demand”
Q: On the impact of the substantial rise in real wages in China ?
“One of the things that 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, then it could
turn into one reason why inflation might be higher than we think.”
Q: On what the impact of the inherited wealth will be.
“I would make two observations. First of all, if people are going
to use their housing wealth to support them in their retirement then
they can’t leave the money to their children as well and that seems to
me a very obvious point.”
“But, secondly, if we look at the state of the economy as a whole
my sense is that it is not saving as much as it would if people were
planning to leave the national capital stock in tact for their
children.”
“So inheritance is an issue but all the things I have looked at, I
should say the data picture, and the individual sources of data aren’t
terribly clear on this, all the things I look at suggest that the amount
people … are leaving in inheritances isn’t enough to wipe out the sort
of short-term effects that I am describing but it does mean that in
future it’s quite likely people will be disappointed by how few assets
they have.”
Q: Have you considered targeting growth as well as inflation, like
the Fed ?
“Well, what you have to remember is that we focus on inflation not
tomorrow or not next month but over a medium term horizon, over a two to
three year horizon and we have to take into account the effects of
economic activity on inflation.”
“Indeed, when we are setting monetary policy we think about what is
going to happen to the growth rate, demand and then follow that through
to the impact on inflation.”
“Now, if I were to paraphrase your question as ‘Would it be a good
idea to go easy on the inflation target, to pay less attention to the
inflation target so that 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.”
Q: Wasn’t QE meant to boost bank lending but that has not happened.
And isn’t it arguable all it does is introduce medium term inflation
pressures ?
“It seems to me most unlikely that quantitative easing could be
leading to inflation without also having some sort of impact on growth.”
“I talked about its effect on asset prices, and the influence of
that on demand, that is something which is intended to support the
inflation rate, to stop it falling below the target level in the medium
term. So quantitative easing is intended to have an effect on inflation,
that is why we do it, and we have been doing it because we were worried
about inflation falling below target.
“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.”
“I think it is also fair to say that different members of the
committee probably do give different degrees of emphasis to the route
through which they think quantitative easing is likely to work and you
might, possibly, find the same sort of thing about interest rates.”
“My sense, and the route I find easiest to explain is that
quantitative easing is expected, and as far as we can see does, lead to
a reduction in medium and long term interest rates. That reduction in
medium and long term interest rates is likely to lead to capital gains
on financial assets and, indeed, on land and that those are likely to
support consumer spending and also higher share prices and lower
medium/long term interest rates are likely to support business
investment.
Q: Do you think a return to normal rates of growth will result in
positive real income growth per capita, and if not won’t the MPC have a
hard task to raise Bank Rate ?
“For me, normal economic growth means normal growth in real GDP and
the population is expanding, but not that much, so that means reasonably
normal growth in income per capita.”
“Now, obviously, that may not happen but my expectation is that
something that we regard as normal growth will resume. Of course, at
that stage we will be a very long way below where one might have
expected to be in the absence of the crisis, and there is a separate
issue, to which we don’t know the answer, whether or how far any of the
ground that has been lost will be made up.”
“You could have normal economic growth resuming and still think,
relative to where we might have expected we would be, the performance of
the economy is rather disappointing.”
–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com
[TOPICS: M$$BE$]
