Bank of England Has Scope to Ease Policy If Needed, Weale Saysby
Official Martin Weale reviews policy options in speech
Still says he believes next move will be a tightening
Bank of England official Martin Weale said the central bank has room to ease policy if the outlook for inflation deteriorates.
In a speech in Nottingham, Weale reviewed the extraordinary measures the central bank has employed and still has at its disposal, while sticking to his view that tightening is more likely over the next two years. The BOE’s benchmark interest rate has been at a record-low 0.5 percent for seven years.
Still, his comments are a further sign of the shifting debate at the U.K. central bank with inflation near zero, far below the BOE’s 2 percent goal. Governor Mark Carney said last month that there’s scope to loosen if needed, and official Gertjan Vlieghe indicated he’s close to voting for more stimulus.
“Should the need for further easing arise because of a sharp weakening in the outlook for inflation, the scope for further asset purchases is substantial,” Weale said. “The obstacles we saw to reducing bank rate below 0.5 percent are no longer material. These observations should, I hope, allay any concerns that it will be difficult to bring inflation back to target.”
In addition to interest-rate cuts, the BOE has bought 375 billion pounds ($533 billion) of gilts to stimulate growth and inflation. Investors focused on a global economic slowdown and the uncertainty surrounding Britain’s referendum on its European Union membership have all but ruled out an increase in borrowing costs for the next three years and are pricing in the prospect of a cut.
Weale, who is due to leave Monetary Policy Committee this summer, said he wanted to consider other unconventional options because the panel doesn’t want to be under prepared or poorly informed.
Purchasing private-sector assets may not be impossible, he said.
“The BOE has 300 years of history of buying private-sector bills of exchange, stretching up to the closure of the bill market shortly before the crisis,” Weale said. “That does not automatically provide a template for purchases of private-sector assets, but it may indicate that the difficulties seen in the past could be resolved.”
On the outlook for policy, he said it’s “appreciably more likely that monetary tightening rather than monetary easing will be needed in the U.K. over the next two years.” Labor-market data suggest inflationary pressures are building rather than easing and a year of low inflation does not seem to have depressed pay prospects, he said.
“Financial markets can go up as well as down; they have risen sharply over the last month,” Weale said. “Commodity prices are also higher while disappointing figures for productivity in the fourth quarter of last year mean that unit-wage costs are firmer than the headline wage figures might indicate.”