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EXCLUSIVE-BoE hawk Weale admits surprised by weak recovery

Published 04/21/2011, 09:45 AM
Updated 04/21/2011, 09:48 AM

* Weale more surpised by weak recovery than inflation

* BoE's May quarterly forecast key for his next rate vote

* Data on wages, inflation expectations encouraging

By Christina Fincher and Sven Egenter

LONDON, April 21 (Reuters) - Britain's recovery in the first quarter has been disappointing, Bank of England policymaker Martin Weale said on Thursday, adding that the BoE's forecasts in May could be crucial to his next vote on interest rates.

Weale has voted for higher rates since January, and has been in a minority of three on the nine-member Monetary Policy Committee for the past three months.

His comments in an interview with Reuters add to signs that the momentum for tightening interest rates at the bank has stalled after a very dovish set of minutes from April's policy meeting on Wednesday.

"First quarter GDP is likely to be weaker than many people, including myself, would have assumed," Weale said in the interview at his office in the central bank.

He said he would not be surprised if first-quarter GDP data came in below 0.7 percent.

A Reuters poll for quarterly GDP growth, due on April 27, shows a median forecast of 0.6 percent, slightly down from the 0.7 percent predicted in a poll earlier this month. [ID:nSLAEFE7SX]

Overall, the recovery looked more fragile than past rebounds, Weale said. "It is likely to be a bumpy road."

"On the basis of the numbers we have, it does look as though the recovery has probably been weaker than one may have hoped given the experience from previous recessions," he said.

Weale said his voting decision next month would be guided by the BoE's new growth and inflation forecasts. "I want to wait to see what the May forecasts look like before deciding what the case (for tightening) looks like," he said.

"It's certainly true that the path of output has been weaker than I had expected when I voted in January. The question is how far something like that influences inflation prospects over the sort of horizon that we're looking at."

Three months ago markets were pricing in as much as a 90 percent chance of a UK rate rise in May. Since then disappointing output data and a surprise fall in UK inflation in March have prompted a rethink and markets are currently not fully pricing in a UK rate rise till November.

RECOVERY CONCERNS

Weale said he had been more surprised by the weak output data than the path of inflation in recent months, and said he shared the view that recent data had highlighted the fragility of the recovery.

"As far as I can tell weakness in construction seems to have played a substantial role," he said. "We had expected a bounce back after December and the cold weather, and that's not the pattern we're seeing."

Weale said a surprise fall in UK inflation last month to 4 percent was also a surprise, but cautioned against reading too much into one month's figures.

While rising price pressures remained a threat, Weale was encouraged by the fall in inflation expectations shown by Wednesday's Citi/YouGov survey, as well as the subdued nature of recent wage deals.

Britain's central bank has kept interest rates at a record low of 0.5 percent since March 2009. But in recent months divergences within the nine-member committee have increased.

In April, arch-hawk Andrew Sentance called for a 50 basis point rate hike, Martin Weale and Spencer Dale both called for a 25 basis point rise and arch-dove Adam Posen called for more quantitative easing.

However, Weale said divisions between policymakers were often overplayed in the press. "The sense I have is that views among MPC are probably less far apart than the reporting of them might suggest," he said.

For HIGHLIGHTS of Weale's comments to Reuters, please click on [ID:nLDE73K0XK]

(Editing by Patrick Graham)

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