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

India-WTO Row

REUTERS SHOWCASE

Market Eye

Market Eye

Nifty falls most in nearly 3-1/2 weeks; Sensex down over 400 points  Full Article 

Factory Activity

Factory Activity

Factories post fastest growth for 17 months in July  Full Article 

Paying for Bail

Paying for Bail

Jailed Subrata Roy gets office to negotiate hotel sales.  Full Article 

Rupee Dips

Rupee Dips

Rupee posts biggest weekly loss since record lows in August.  Full Article 

Reviving Infosys

Reviving Infosys

CEO Sikka says to improve business with new growth avenues  Full Article 

Outlook Slashed

Outlook Slashed

ArcelorMittal cuts outlook as ore prices hit mining  Full Article 

Re-gaining Momentum

Re-gaining Momentum

China, Asian factory growth gathers pace; Europe falters  Full Article 

Factory Lockout

Factory Lockout

Pfizer says threats to managers force staff lockout at Mumbai factory .  Full Article 

Gold Smuggling

Gold Smuggling

In cat-and-mouse game, India uncovers new gold smuggling route.  Full Article 

Reuters India Mobile

Reuters India Mobile

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