Double-dip recession looks more likely now says Weale

The outlook for Britain’s economy has worsened in recent weeks and the risk of a double-dip recession is higher than in July, Bank of England policymaker Martin Weale said yesterday.

However, inflation was still a problem and not all recent news pointed towards a significant undershoot of the Bank’s inflation target in the medium-term horizon, necessary to warrant more quantitative easing, Weale said.

“Looking at what’s happened in the last two months or so anyone would have to say that it [the risk of recession[ is greater than it seemed in July,” Weale said.

The external member of the Bank’s monetary policy committee said he saw his voting as pragmatic.

“So when I come to the October meeting I will have to form view about what is the bigger risk – the high level of inflation that’s well above target and has been well above target for a long time or the fact growth prospects do seem to have worsened in the last few weeks,” he said.

“I would consider more asset purchases were warranted if it seemed likely that inflation was substantially going to undershoot the target.”

The BoE left interest rates at a record low of 0.5 per cent at its meeting earlier this month and also kept the stock of asset purchases at £200 billion.

Minutes for the September meeting are due for publication next Wednesday. Weale dropped his vote for higher rates in August – along with BoE chief economist Spencer Dale – in what was seen as a significant shift towards further monetary easing.

Weale indicated that he was not fully convinced of the need for further quantitative easing. “I think I can say that there are inflationary issues as well as growth issues,” he said.

“Since the [BoE’s August] forecast, commodity prices have been more buoyant than we’ve expected and wage growth has picked slightly more than we’d expected,” Weale said.

“I am not saying that those necessarily offset the worse growth outlook. But we should certainly not assume that if one focuses on inflation that all the news has been one way.”

Even the message from weak business surveys such as the sharp drop in the services Purchasing Managers’ Indicator was not fully clear yet, Weale said.

“At the moment think the judgment is out,” he said. “What went on in 2008, was that the indicators got worse and worse and so far that hasn’t been happening but it’s obviously something I’ll be keeping a very careful eye on.”

An increasing number of analysts expect the Bank of England to engage in a fresh round of asset purchases, though so far Adam Posen has been the only one of the nine-member MPC voting for more easing.

Weale reiterated that quantitative easing would still boost the economy, saying there was “plenty of scope” at the long end of the market. Weale also highlighted that the crisis in the eurozone was the biggest risk for the British economy.