BOE’s Weale Sees Upturn in U.K. Inflation Expectations

Bank of England policy maker Martin Weale said U.K. inflation expectations have increased and that officials shouldn’t add further stimulus to the economy.

“There has been some upturn to inflation expectations,” Weale said in a speech in London today. “The belief that bank rate would remain at 0.5 percent into 2016 might encourage a further rise,” he said, noting that slowing consumer-price growth doesn’t mean the BOE should provide more support to the economy.

The pound rose after Weale’s comments. The Monetary Policy Committee member also said that headwinds to the economy have eased and problems in the euro area appear “more manageable.” His comments come two days after the BOE published new economic forecasts and Governor Mark Carney said that a recovery has “taken hold.”

Sterling extended its advance against the dollar and was at $1.6119 as of 2:12 p.m. London time, up 0.3 percent from yesterday.

The BOE introduced forward guidance this year and has said it won’t raise its benchmark rate from a record low at least until unemployment has fallen to 7 percent. The pledge is subject to caveats linked to the BOE’s 2 percent inflation goal and financial stability.

Spare Capacity

In his speech today, Weale said the MPC will also need to take account of how fast the jobless rate is falling.

“If unemployment is falling rapidly, e.g. much faster than our central forecast, we will need to consider the risk of holding rates too low for too long,” he said. “Even with inflation close to target, it is unlikely to be appropriate for rates to remain at their current level until all spare capacity in the economy has been used up.”

The BOE sees gross domestic product rising 0.9 percent this quarter before easing in the early part of 2014, according to its new projections. Weale said the BOE’s key rate is “extraordinarily low” and it “would not be surprising if the economy grew faster than we have forecast.”

The bank’s forward guidance framework has “transformed” the way he considers inflation expectations in his policy decisions into a “key influence,” he said.

“The fact that, with forward guidance, we have set out policy explicitly with reference to inflation expectations means that we have to be much more rigorous than we were,” Weale said. “We cannot risk a situation where people say we are deliberately looking the other way if the data show a significant change in inflation expectations.”

On the pound’s appreciation, Weale said while it has helped to reduce headline inflation in the U.K., he is not “comfortable” with it as it “only worsens my concerns about the balance of payments.”

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