Martin Weale: We don't want to go back to the 1970s
He is more guarded than he used to be. But he's not afraid of raising the alarm over inflation, the Bank of England rate-setter tells Ben Chu
Lamenting the tendency of his economic advisers to respond to every question with the words "on the one hand … on the other hand" Harry Truman famously yearned for a "one-handed economist". Martin Weale is probably not the sort of adviser the American president was searching for.
During his 15 years as director of the National Institute of Economic and Social Research Mr Weale established a reputation as a trenchant and quotable commentator. Gordon Brown was castigated for fiddling his famous Golden Rule on borrowing. "One can already smell the fudge being cooked in Great George Street," remarked Mr Weale in a memorable phrase in 2002. George Osborne also earned a rebuke in the wake of his 2010 emergency budget. The new Chancellor was "not ambitious enough" when it came to cutting the deficit, argued the NIESR director.
But since being appointed to the Bank of England's Monetary Policy Committee in July 2010 Mr Weale has learned to hedge his once-biting judgements. And he was a study in caution in his interview with The Independent at his wood-panelled offices in the Bank of England this week. Consider the question of whether the UK's inflation target should be replaced with a nominal GDP target to get growth going, Mark Carney, the Canadian central bank chief who will replace Sir Mervyn King as the Bank's Governor in July, floated the change in a speech in Toronto last month. So what does Mr Weale, who would find himself charged with helping to deliver such a target if he stays at the MPC for a second term, think of it?
"Whether different arrangements might appear attractive or not depends very much on the context in which you see them," he said. "The US has enjoyed inflation much closer to 2 per cent than we have. For the US to be thinking of adopting something is one thing. For us to be thinking about changing the target in the aftermath of a period when inflation has been appreciably above target is a very different thing." It's difficult to discern a thumbs up or a thumbs down in that answer.
What about quantitative easing, the Bank's £375bn asset purchasing programme designed to stimulate spending? Has money printing, as some analysts argue, lost its ability to boost the economy? It's an urgent question given that GDP contracted in the final three months of 2012 and that calls for a further fillip are multiplying. "More than a year ago I said that I thought the Bank's central estimates of the effect of QE were at the upper limit of what I thought was likely [but] I'm certainly not saying that I think it had no impact," responds Mr Weale. Again, hardly an answer that serves as a model of clarity.
Yet this is how most central bankers tend to speak. Knowing that traders interpret their every word, practitioners often seek refuge in blandness and equivocation.
And, to be fair, Mr Weale does not hide his reservations about the potential inflationary impact of a nominal GDP target, even if he doesn't come down firmly on one side or the other.
"Suppose we were to adopt a nominal GDP target for 4 per cent per annum and suppose also that productivity didn't pick up just because the MPC tried to stimulate the economy. If it were to deliver the target inflation would pick up to 4 per cent a year. Given where we've been recently it would be very surprising if inflation expectations didn't pick up on the back of that," he says.
He adds that Sir Mervyn was right to point last week to the danger of returning to the high inflation of the 1970s and 1980s. "I think people would look back and say that's not an experience we would like to repeat," he says.
Mr Weale has developed a reputation for hawkishness on the MPC. Between January and July 2011 he advocated a rise in interest rates in order to curb inflationary expectations. That all changed in October of that year when the MPC, as one, suddenly voted for £75bn QE. So in hindsight was Mr Weale wrong to have pushed for higher rates in the first half of that year?
"The reason I was doing that was that I didn't think inflation would fall back to target as rapidly as our central forecast suggested. So you might say that, looking at where we are now, far from getting things wrong I got that aspect of things right," says Mr Weale, referring to the fact that inflation remains stubbornly above the Bank's 2 per cent target.
Mr Weale is encouraged by the performance of the Treasury/Bank of England Funding for Lending scheme in boosting loan availability. But he is careful to point out that the door is not shut on more money printing by the Bank. "I certainly wouldn't say that I see QE as parked," he says.
Sir Mervyn's tenure at the MPC has been a contentious one, with multiple voices accusing the outgoing Governor of exhibiting autocratic tendencies. Adam Posen, a former MPC member, complained last week about the failure of the Bank's ruling Court to stand up to Sir Mervyn. Does he recognise Mr Posen's criticisms? Mr Weale is diplomatic. "Speaking as someone who has run an organisation, you need someone who is clearly in charge and who is responsible for what goes on a day-to-day basis. That's not to say they shouldn't be open to challenge."
So how does he think history will judge the outgoing Governor? "The financial crisis and the way we eventually get over that will be the basis for historical judgement and so, as Zhou Enlai said about the French Revolution, it's rather too early to say."
Mr Weale's advice for Sir Mervyn's Canadian successor is to tread carefully. "On monetary policy, yes, you need to keep an open mind but at the same time consider all the risks." But Mr Weale doesn't share the view that the Governor's job, which will include oversight of financial regulation, is too big for one man to handle. "As we know, one man – or one woman – has run the affairs of whole countries and that's more complex than just the Bank of England," he says. It's a fair point, but one unlikely to offer Mr Carney much comfort in the inevitable battles to come.
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