Weale Sees Stronger BOE Stimulus Case as Inflation Risk Ebbs

Bank of England policy maker Martin Weale said there’s a risk the U.K. fell into another recession in the first quarter, and signaled easing inflation pressures may reduce the barrier to more stimulus.

“The inflation position, at least from my perspective, has improved somewhat,” Weale said in an interview in London today. There has been a “favorable signal from wages and the other favorable signal very recently has been the news on commodity prices. They certainly make me feel there’s more room for maneuver than there would have been if they hadn’t happened.”

The BOE’s Monetary Policy Committee has split on the need for more quantitative easing, with Weale siding with the majority this month to keep the target for bond purchases on hold, citing the risks from above-target inflation. With data on April 25 showing whether the U.K. slipped into an unprecedented triple-dip recession in the first quarter, Weale said the report will influence his May policy vote.

“There is enough of a margin of uncertainty for me not to be surprised” if there was a “minor contraction,” he said. “There’s certainly a risk of that.”

Inflation Expectations

The MPC majority that voted to keep QE on hold on April 4 said that medium-term inflation expectations had “drifted upwards” and further easing may exacerbate this. While Weale said today there are signs in the bond market of an “upward creeping” in expectations, he noted some pressures on prices appear to have eased. The 57-year-old joined the MPC as an external member in 2010.

“Inevitably if the underlying inflationary pressures look weaker, then the case for stimulus becomes stronger,” Weale said. “When you have these underlying concerns about inflation expectations and inflation history, favorable news on the short term does ease my longer-term concerns.”

The pound erased its advance against the euro after the comments were published and traded at 85.54 pence against the single currency as of 3:58 p.m. London time. It pared its gain against the dollar, weakening to $1.5282 from $1.5310 before Weale’s remarks.

Brent crude oil prices have fallen about 17 percent in the past two months and have dropped below $100 a barrel for the first time since July 2012.

Data this week showed that U.K. pay growth slowed to 1 percent in the three months through February, the least since records began in 2001. Growth in unit labor costs slowed to 1.8 percent in the fourth quarter of 2012 from 2.9 percent in the previous three months and 3.4 percent in the second quarter.

Forward Guidance

Chancellor of the Exchequer George Osborne reworked the BOE’s mandate last month before the arrival of Mark Carney as governor and asked the MPC to assess the merits of forward guidance. Asked about such a policy, Weale said it can be difficult to implement in practice.

“Forward guidance, particularly if it’s associated with thresholds, in the British context, does have problems,” Weale said, noting that it could back the MPC into a corner. We may “find ourselves either saying we’ve changed our mind, which would be a problem, or we’d have to tighten policy at a time when, as it turns out, no one on the committee has been voting for that,” he said.

On other policy measures, Weale said central bankers must have an “open mind.” The MPC said this week that it “saw merit” in a possible extension of its Funding for Lending Scheme, set up last year to boost credit.

“Monetary policy is now more than rates, and the letter was an acknowledgment of that,” he said, referring to Osborne’s mandate change. “I think it’s very important for central bankers to keep an open mind about what instruments are available to them.”

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