Bank of England policy maker Martin Weale said that U.K. inflation may prove more persistent than expected, making it unlikely the economy will require further stimulus once the current round of bond purchases ends.
Higher oil prices and potential wage pressures as the economy recovers “suggest a risk that there may be more persistence to inflation than one might expect at a time of rising unemployment and weak demand,” Weale said in a speech in London late yesterday. “I do not think there is likely to be a further case once our current program is complete” in early May for more bond purchases.
Weale’s comments are the most explicit indication by an official that the Monetary Policy Committee’s 50 billion-pound ($80 billion) increase in stimulus in February may be the last. Still, Governor Mervyn King said yesterday that any further loosening of policy will depend on how the economy performs.
Speaking at an event at Cass Business School, Weale said that consumption “appears to be growing again” and “indicators of the state of the economy this year have been more positive for overall gross domestic product growth.”
Still, “we need to remind ourselves that the signals they provide are imprecise and that a few swallows do not make a summer,” he said. Data will be “harder to interpret” this year due to the extra public holiday for the Queen’s diamond jubilee, he noted.
The pound was little changed against the dollar today, trading at $1.5923 as of 8:43 a.m. in London. U.K. bonds rose, pushing the yield on the 10-year gilt down 1 basis point to 2.16 percent. It fell to 1.917 percent on Jan. 18, the lowest since Bloomberg began compiling the data in 1989.
Policy maker Paul Fisher said on Feb. 26 that the risk of the U.K. slipping into another recession may have been avoided, and if a positive trend continues, “that would put more weight onto the argument for stopping rather than carrying on” with more bond purchases. Deputy Governor Paul Tucker said Feb. 28 that policy makers must be “alert to the need” to gradually withdraw stimulus when the economy strengthens.
The MPC voted to increase stimulus to 325 billion pounds on Feb. 9 after the economy shrank 0.2 percent in the fourth quarter. David Miles and Adam Posen were defeated in their call for a 75 billion-pound increase at the meeting. The new round of purchases is scheduled to be completed in May.
U.K. inflation slowed to 3.6 percent in January, the least in 14 months. Weale said that while the rate has “fallen sharply” as a sales-tax increase in January 2011 and “some of the fuel-price increases” have dropped out of the inflation calculation, it remains above central bank’s 2 percent target.
“The price of oil is a particular worry,” he said. “Further ahead, there remains a risk that an eventual return to more normal economic conditions will be associated with increased wage pressures. Judgements about the magnitude of this are inevitably uncertain and it is hard to avoid the sense of an additional upside risk.”
A report today showed U.K. pay growth accelerated in the quarter through January. The median wage deal increased to 3 percent from 2.5 percent in the previous three-month period, Incomes Data Services said.
Weale also said that higher-than-forecast inflation may prompt the central bank to increase rates earlier than the market currently predicts. In response to questions at the event, he said policy makers could choose to raise their benchmark rate before selling the bonds held as part of their stimulus program.
“The yield curve suggests that an increase in bank rate is not fully priced in until mid-2014,” Weale said in the speech. “If the very real risks I see about inflation do materialize, then it is perfectly possible that the first rise will come earlier.”
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