Weale Says U.K. First-Quarter GDP May Have Declined: Interview

Bank of England policy maker Martin Weale comments on inflation expectations, the case for more stimulus, the pound, and on whether the economy will contract in the first quarter.

He spoke in an interview in London today.

On above-target inflation:

“I am concerned. After a long period of above-target inflation there are very obvious risks in the MPC suggesting that it isn’t taking the inflation target seriously. I’m not saying my colleagues who voted for asset purchases don’t take the inflation target seriously, but we do need to be very aware of the possible impact of providing extra support now on people’s expectations.”

On inflation expectations:

“In bond markets there is some evidence of upward creep in inflation expectations. What has worked the other way round recently is that wages have been extremely stable. If you look at regular wages, average weekly earnings, there’s been no growth at all since April. I think that essentially is unprecedented, certainly over the post war years. So we need to think more about that, but that is from the inflation point of view a favourable sign.”

“It’s the recent history of inflation that makes me more concerned about further policy easing.”

“The history matters and it influences me very strongly. I would be surprised if the history of the last five years has had no impact.”

“I can see why inflation expectations should be starting to rise. Indeed, given where inflation has been over the last five years, you might say the bigger surprise is that that didn’t happen sooner.”

“What we have working against that are the expected movements in administered and regulated prices. But looking at the transactions in the markets that have a direct bearing on inflation, I would say that if anything there has been something of an improvement recently.”

“Wage pressures seem to be less than one might have expected.”

On the recent decline in commodity prices and inflation:

“I mentioned the favourable signal from wages, and the other favourable signal very recently has been the news on commodity prices. Those certainly make me feel that there’s more room for maneuver than there would have been if they hadn’t happened.”

“Inevitably if the underlying inflationary pressures look weaker, then the case for stimulus becomes stronger. I know that we aren’t thinking about the very short term, and we’ve been quite right to say that, but at the same time when you have these underlying concerns about inflation expectations and inflation history, favorable news on the short term does ease my longer-term concerns.”

On the pound and inflation:

The pound’s recent decline “would be very surprising if it didn’t lead to some further upward growth in prices. That’s one of the things we have taken into account. Certainly last year I didn’t realise quite the role that the rise of the pound was playing in creating a more favourable inflation outlook. Since then, all that’s happened is that that’s been unwound, but that’s taken us back to where we would have been had there never been this rise.”

On more targeted policy measures:

“The minutes did say that the committee saw some merit in thinking more about the FLS and I think that’s absolutely right. It’s entirely right we should be looking at the various instruments available to us and what they can do and then deciding on the appropriate use of those different instruments. It’s very clear things have moved a long way from the so-called conventional position that monetary policy is changing the interest rate.”

“To the extent that we feel there are measures available to us to ease credit problems, there is obviously a case for them and we need to think about the impact of those relative to the impact of more asset purchases.”

“It’s not necessarily a question of one or the other. If you think of the sort of credit-easing policies, they aren’t something that you do one month and then decide to do a bit more of the next month. They’re more part of the background.”

“Are there further things that could be thought of that might seem desirable in some circumstances? I’m sure there are, but at the same time the point I’d make is that, at least with the current committee, as you saw from the last minutes, we have been discussing whether we want to provide extra stimulus and the people who were voting against I don’t think they were voting against because they thought it didn’t work. I think they were voting against because they thought it wouldn’t be a good idea.”

On amending the Funding for Lending Scheme now:

“I’m keeping an open mind on it at the moment. As I say the inflation position, at least from my perspective, has improved somewhat. The other point you need to remember about the FLS it has in large part, because of its existence, led to much improved access to market funding by the banks, so it’s playing more of a role of backstop now than as an essential source of funding.”

On first-quarter GDP data:

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

On the economic outlook:

“The prospects for the economy are somewhat better they have been recently.”

On using forward guidance as a potential policy tool:

“Forward guidance, particularly if it’s associated with thresholds, in the British context, does have problems.”

“Suppose we had a year ago set a policy with forward guidance and thresholds and set the threshold at 2.5 percent. We would now find ourselves either saying ‘We’ve changed our minds,’ which would be a problem, or we’d find ourselves having to tighten policy at a time when, as it’s turned out, no one on the committee has been voting for that.”

“As the last year has demonstrated -- the combination of higher than we expected inflation and continuing weak growth -- circumstances can arise... where it would actually make subsequent policymaking harder rather than easier. You could say we could set a higher threshold, but the committee would need to take into account that that might lead people to think we’re less concerned about inflation.”

On the changes to the BOE remit:

“Generally, there’s been an understanding that monetary policy means more than just interest-rate setting. In some sense, this takes us back to the 1960s and 1970s when there were all kinds of things that were monetary policy like direct credit controls. Monetary policy is now more than rates and the letter was recognition of that.”

On the exit of quantitative easing:

“At a time when the economic situation has improved and interest rates have returned to something more normal, then what we will see is that central banks -- the Bank of England and others -- will announce a gradual program of selling off their assets. That will be going on in the background. With that going on in the background, monetary policy decisions will be made by varying the interest rate once again.”

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