–Adds Detail At Top Of Story To Version Transmitted At 1110 GMT
–Doesn’t Have Strong View Policy Too Tight/Too Loose
–Monetary Policy First Line Of Defense If Economy Weakens Sharply
–Sees Reasons Why Unemployment Could Rise Further

LONDON – New Bank of England Monetary Policy Committee Member
Martin Weale said he was “comfortable” with the MPC’s current policy
setting, and he did not believe it was clearly too tight or too loose.

Weale, in evidence to the Treasury Select Committee Tuesday, also
maintained monetary policy should respond if there was a significant
downturn in the economic outlook, with quantitative easing an obvious
policy instrument.

“I have not had a strong view that policy at the moment is either
too tight or too loose. I think the economy is recovering. That recovery
is likely to be fitful, but I am comfortable with the policy setting
that we have,” Weale said.

Weale firmly rejected the view inflation expectations have become
“de-anchored” from the 2% CPI target as a result of high inflation
outturns.

“The evidence I’ve seen does not suggest inflation expectations
have become de-anchored. The MPC does look at this and it’s not the
picture we’re seeing in the data. If inflation expectations were
becoming de-anchored, I’d expect to see the effects of that in wage
bargaining and I’m not seeing that at the moment,” he said.

Weale warned that the recovery could be slower than some people had
hoped and said monetary policy should be activated if the economy does
weaken sharply.

He was asked if he believed further quantitative easing should be
employed if the economy recovers less strongly than expected.

There “may be a slower recovery path than some people had hoped,”
Weale said and “if things were to weaken sharply then I think monetary
policy should be the first line of defense.”

While fiscal policy could play a role dealing with a downturn, the
MPC would be ready to use monetary policy.

“I can’t imagine no circumstances in which people think fiscal
policy could play a role, but the MPC will, would, be looking at what it
could do with monetary policy if there were to be a sustained period of
considerable weakness,” Weale said.

He downplayed the chance of a rapid recovery.

“The profile of recovery from the trough of recession we have seen
recently is largely similar to the sorts of things that happened in
previous recessions,” Weale said.

Weale also warned unemployment could rise further.

While “unemployment has been much weaker than people like myself
had initially feared … I can think of reasons why unemployment should
rise further,” he said.

He said the rise in unemployment could be greater than assumed by
the Office for Budget Responsibility – which produces the “official”
forecasts underpinning the Budget.

“The MPC is not looking at jobs, it is looking at inflation. I
think it is fair to say that before I joined the MPC that I could see
reasons why unemployment could rise further than the OBR is suggesting,
I don’t think I’ve changed my mind since then,” Weale said.

The new MPC member was skeptical about the ability of quantitative
easing to boost the supply of credit to small to medium sized
enterprises.

The BOE has focused QE on gilt purchases, and has also bought a
small amount of corporate bonds.

“I don’t think one could expect credit to get to the SMEs through
the bond market. Obviously, when quantitative easing was started people
didn’t know what was likely to happen because nothing on that sort of
scale had been tried before, not in the recent past,” Weale said.

He said the authorities should be ready to act if credit conditions
deteriorate.

“Quite probably there are some businesses who are having problems
accessing credit and we should have plans in place in case there is a
sharp worsening situation, not that I’m expecting that, but it could
happen,” Weale said.

Weale said people had hoped changes in bank balance sheets as a
result of QE may encourage the banks to lend more to SMEs.

“It is possible that route has been a bit weaker than people had
hoped,” Weale said.

Weale was asked if the fall in market interest rates was due to the
fiscal tightening unveiled by the new government.

“It is possible that it does have something to do with the fiscal
package. On the other hand, we have to remember that interest rates have
also fallen sharply in the United States and the United States shows as
yet no sign of reducing its fiscal deficit,” Weale said.

Weale, in light of his somewhat pessimistic view of the UK
recovery, has been perceived as a monetary policy dove.

“Whether one is a hawk or a dove is in the eye of the beholder,”
Weale said.

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