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26 August 2011

The bank’s inflation hawk changes his tune

MPC member Martin Weale, who voted regularly for rate rises, says further QE remains an option.

By George Eaton

The markets are braced for Ben Bernanke’s Jackson Hole speech today (3pm UK time) at which he could announce another round of quantitative easing (dubbed QE 3), although the odds are that he won’t. Since last year’s speech, which preceded $600bn of QE, inflation has risen further and US borrowing costs, which quantitative easing is designed to reduce, are already at post-World War II lows.

We’ll be covering Bernanke’s speech on our US sister blog (The Star Spangled Staggers) but back at home it’s worth noting, as our own David Blanchflower has, an important intervention by monetary policy committee [MPC] member Martin Weale. Weale, an inflation hawk who voted regularly to raise rates until the most recent MPC meeting, has suggested that the faltering recovery means further monetary stimulus, in the form of quantitative easing, remains an option.

In a speech at the Doncaster Chamber of Commerce last night, he said: “Substantial further weakening of inflationary pressures would, of course, mean that additional monetary support rather than a withdrawal of that support would be the appropriate policy”. Similarly, in an interview in today’s Yorkshire Post, he remarks:

As I see things at the moment, I don’t think there’s a case for it (quantitative easing), if I thought the economy was likely to weaken substantially further and therefore inflation was likely to come in well under target, then obviously I would change my mind. The banking system as far as I can see is in much better shape than it was in 2008, liquidity is better, there has been quite a lot of capital raising so the banks are much healthier, but again one of the things that could create a need for more quantitative easing would be if banks did become more reluctant to lend again.

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As you’ll have noticed, Weale’s comments on QE come with several caveats attached but the fact that a man who voted for a rate hike little more than a month ago is now contemplating further stimulus is a reminder of just how much the economic situation has deteriorated in recent weeks.