Weale Says QE Scope Limited by Risks to Inflation Expectations
“Failure to damp sufficiently any new shock pushing up on inflation would result in inflation expectations becoming more entrenched,” he said today in a speech in Birmingham, England. “That, in my view, limits the scope we have to support demand at the current juncture.”
The central bank raised its growth forecast and lowered its projection for inflation on May 15, a week after officials maintained their bond-purchase plan at 375 billion pounds ($572 billion). Minutes of the decision to be published next week will show whether Governor Mervyn King and two colleagues kept up their push to expand bond purchases by 25 billion pounds.
The government has broadened the BOE’s mandate in the style of the U.S. Federal Reserve, giving officials more latitude to stimulate growth amid inflation shocks as Mark Carney prepares to take over from King on July 1. Weale, who has opposed the push to increase QE, said the U.K.’s history of above-target inflation stays his hand and contrasts with the Fed’s position. Inflation is now in its fourth year above the 2 percent target, with consumer prices rising a year-on-year 2.8 percent in March.
“I have certainly felt that this history is a constraint on my freedom of action,” he said. Unstable and high inflation hasn’t been a problem for many years, “and inevitably the lessons from that get blunted with the passage of time. But the long-term context is certainly one where, without appropriate monetary policy, those problems could return.”
Weale said market expectations for the bank to keep interest rates low accurately capture his view on the outlook for policy. The bank has held its key rate at 0.5 percent since March 2009.
“The market signal pointing to low interest rates for some time to come is certainly at present consistent with the way I see the outlook for the economy and the balance of risks affecting inflation and output,” he said. The MPC “has concluded that this implied path for bank rate is consistent with its remit, at least in current circumstances.”
Inflation expectations are the highest among the Group of Seven nations. The five-year breakeven rate, a gauge of investor expectations derived from the difference in yield between regular and index-linked bonds, has risen to 2.90 percentage points from 2.24 points at the end of 2012.
The remit change, announced by the Chancellor of the Exchequer George Osborne in March, “has led to a broader and more realistic public understanding” of the problems confronting the Monetary Policy Committee, he said. There’s also a burden on officials to explain their commitment to their goal.
“It is not enough for us to do our job seriously; we have to explain that we take it seriously,” he said. “If we undertake this task effectively, there should be very little entrenchment of inflation expectations, while if we are poor at it, the effect may be substantial.”
Upward inflation pressures “have eased somewhat” so that risks around the 2 percent target “are now more or less evenly balanced,” Weale said.
The improved growth outlook has also been influencing his votes to keep policy on hold, he said. The BOE forecast 0.5 percent growth in the current quarter, after the economy expanded 0.3 percent in the first three months of the year.
“No one can be certain but it is possible that the near-stagnation of the past three years is being replaced by a move to modest growth,” he said. “The sense that the improved growth outlook we have been forecasting throughout my membership of the committee may now be starting to appear has certainly influenced my voting.”
Upward pressure from government-controlled prices offsets the deflation risks from low growth in labor costs, he said.
“A further easing of the rate of growth of cost pressures is necessary before I feel we are in danger of undershooting the inflation target,” he said. “Such an easing may be in prospect if wage growth remains very weak while productivity performance improves.”
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