“I think it is more likely than not that inflation will remain above target for much of the next two years,” Weale said in prepared remarks for a speech to be delivered later today in Manchester, England. “My analysis suggests that additional stimulus would, without any corresponding improvement in productivity, add to inflation.”
Weale’s comments contrast with those of his colleague David Miles, who said three days ago that there is more the central bank can do if recessionary conditions persist, and indicate continued divisions among the Monetary Policy Committee on stimulus. The BOE will publish the minutes of its Nov. 7-8 meeting at 9:30 a.m., showing how officials voted when they halted expansion of their bond-purchase program.
Separately today, the BOE’s Financial Policy Committee, which is led by Governor Mervyn King, holds its quarterly meeting. After its last meeting in September, the panel maintained its recommendations for banks to raise capital to stave off threats to the financial system. The central bank will publish its next FPC statement, along with the twice-yearly Financial Stability Report, on Nov. 29.
In his speech, which he will deliver at the Manchester Economics Seminar, Weale said there is a risk to the Bank of England’s credibility as long as inflation remains above the 2 percent goal. Consumer-price growth accelerated to 2.7 percent in October and the central bank raised its near-term inflation forecast earlier this month.
“While inflation remains above target, there is an obvious risk that, at some point, people involved in setting of wages and prices will start to think that we do not take the inflation target serious,” he said. “It need not be a sudden change. The risk is all the greater because the change is more likely to be very gradual.”
In a Nov. 18 interview on Sky News television, Miles said the U.K. “may need more stimulus” and that it will “depend on how the headwinds holding back growth play out.” Weale said that while there is “an argument for a further stimulus,” there is uncertainty about the reasons for weak productivity and its potential impact on inflation.
It’s possible that “a revival of demand would lead to a sharp improvement in productivity growth,” he said. “But, at the moment I do not feel we have a quantitative understanding of the factors contributing to weak productivity clear enough to be confident that productivity would move in line with a sharp increase in demand.”
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