BoE’s Weale: rates still likely to rise, scope for stimulus if needed

NOTTINGHAM, England The Bank of England (BoE) is still more likely to raise interest rates than to cut them over the next two years, but it has plenty of scope to stimulate the economy if needed, one of the bank’s policymakers said on Tuesday.

Martin Weale, in a speech at the University of Nottingham, challenged the view among some investors that central banks had run out of ammunition to boost their economies at a time when the world’s recovery from the financial crisis has slowed.

If needed, the BoE could cut rates below their current record low of 0.5 percent or launch a new round of quantitative easing, possibly purchasing private-sector assets, Weale said.

“The scope for further asset purchases is substantial, while the obstacles we saw to reducing Bank Rate below 0.5 percent are no longer material,” he said.

Weale, who backed a rate rise in late 2014, said on Tuesday that underlying inflation pressures were greater than they appeared at first glance, because weak productivity was offseting the effect of sluggish wage growth.

He also said a recent recovery in oil and other commodity prices backed up his view that the sell-off in financial markets at the start of 2016, which some investors saw as a warning sign about the world economy, was speculative.

Like the Monetary Policy Committee as a whole, he said the next move in rates is more likely to be up than down, though gave no hint on timing.

“Financial markets can go up as well as down- they have risen sharply over the last month. 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,” Weale said.

Economists in a Reuters poll pushed back their bets on when the BoE would start to raise rates to early 2017, reflecting a weaker global economy and persistently low inflation.

The ability to provide more stimulus if needed reduced the dangers associated with starting to raise rates, Weale said.

In contrast to some economists, he said further quantitative easing by the BoE was still likely to be effective and Weale said in the early 1980s, the BoE held private assets worth 5 percent of annual economic output.

Weale said there was also the option of pushing interest rates below zero, following the lead of the European Central Bank and the Bank of Japan among other central banks.

But he echoed BoE Governor Mark Carney’s concerns that such a move could hurt bank lending and lead to competitive exchange rate devaluations. “It is important to be aware of the risks associated with such an approach,” Weale said.

(Writing by David Milliken- Editing by Louise Ireland)