BoE's Weale says weak productivity barrier to more stimulus

LONDON Tue Nov 20, 2012 11:13pm IST

LONDON (Reuters) - Britain's poor productivity means further Bank of England economic stimulus would not be able to generate growth without stoking excess inflation, BoE policymaker Martin Weale said on Tuesday.

Earlier this month, the BoE's Monetary Policy Committee voted not to extend the central bank's 375 billion pound ($597 billion) asset purchase program, and last week BoE Governor Mervyn King said this was largely driven by an above-target inflation outlook.

Weale said that while one of his BoE colleagues, David Miles, had argued that stronger growth would resolve Britain's productivity problem, he did not think there was enough evidence that the boost would be significant.

"My analysis suggests that additional stimulus would, without any corresponding improvement in productivity, add to inflation," Weale said.

Weale's comments came in a speech he intends to deliver on Wednesday at the University of Manchester, an advance copy of which was provided by the BoE.

Other policymakers' views will become clearer in minutes of the BoE's November policy decision, which will be published at 0930 GMT on Wednesday.

However, Berenberg Bank economist Rob Wood said that Weale's opinions were probably fairly representative of the rest of the MPC, as productivity concerns had surfaced in last week's quarterly economic outlook from the central bank.

"With the focus on the limits to policy, it's unlikely that any evidence over the next few months will change the picture for monetary policy. We are unlikely to get significant news on productivity," Wood said.

Wood added that he believed Weale's concerns were exaggerated, and that the central bank did have scope for more stimulus without driving inflation higher.

Last week the BoE upwardly revised its inflation forecasts, and in line with this Weale said he expected inflation to exceed the BoE's 2 percent target for most of the next two years.

British inflation suffered its biggest jump in more than a year last month, rising to 2.7 percent, which Weale described as "an unwelcome surprise".

A rise in university tuition fees and higher food prices lay behind the rise, and further increases in inflation are pencilled in by the BoE due to upcoming rises in utility bills.

Weale said that while the BoE's inflation models often predicted that higher prices in one part of the economy would push down prices elsewhere, due to reduced consumer purchasing power, he did not believe this would be as true now.

"It is quite an act of faith to believe that other price-setters will put up their prices less because they anticipate spending power being reduced as a result of these administered price changes, at least without the Bank of England maintaining a tighter monetary policy than would otherwise be the case."

Britons have meanwhile suffered falling living standards as wage rises of just under 2 percent a year have failed to keep up with inflation, squeezing consumer demand and hampering growth.

However, Weale warned that low productivity meant that higher wage rises would generate more inflation.

"With stagnant or falling productivity, wage growth of even 2 percent per annum is at best barely compatible with the inflation target," he said. ($1 = 0.6284 British pounds)

(Reporting by David Milliken; editing by Ron Askew)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Scotland Referendum

Scotland Referendum

Scots vote in record numbers, await independence verdict.  Full Article 

India-US Diplomacy

India-US Diplomacy

Obama to nominate Indian-American Richard Verma as India ambassador - congressional source.  Full Article 

GMR in Nepal

GMR in Nepal

Nepal clears India’s GMR plan for $1.4 bln hydroelectric plant.  Full Article 

LIC on Markets

LIC on Markets

LIC chairman bullish on Indian markets  Full Article 

India Rains

India Rains

Monsoon rains weaken as late retreat looms.  Full Article 

Ellison Quits

Ellison Quits

Oracle's Ellison steps aside, co-CEOs Catz and Hurd take over.  Full Article 

Infosys-Huawei

Infosys-Huawei

Infosys partners with China's Huawei for cloud-based services  Full Article 

Gold Outlook

Gold Outlook

Gold imports seen up, premiums likely to double on festive buying  Full Article 

Trade Dispute

Trade Dispute

U.S. to press India on trade row during Modi's Washington visit  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage