MPC’s Weale: UK will take five and a half years to recover

The UK will take five and a half years to recover to pre-recession levels, said Bank of England external MPC member Martin Weale in a speech today to the National Institute of Social and Economic Research (NIESR).

He said the recovery was "unusually slow" and more QE was highly likely.

Weale blamed the downturn on worsened productivity growth causing a slow-down in consumption and the fact the mid 1990s saw unusually high consumption sustained by heightened consumer borrowing.

"Even if weak consumption is an important factor behind the poor performance of the economy, that does not mean that rapid growth in consumption is the only way of sustaining the recovery."

Weale said he hoped additional QE would add 0.5% to economic output but it would not be enough on its own to save the UK's flagging economy.

"Current circumstances make clear more than ever that monetary policy is only one part of overall economic policy...Monetary policy cannot, on its own, set the economy on a sound and sustainable long-term growth path," he said.

He added the UK needs to rebalance towards a more productive, export-led economy, but this was out of the Bank's control and would be easier once the economy begins to grow again.

The BoE member said the MPC was keen to stem inflation through QE, but would need to see signs of inflation getting under control.

It might be prudent to wait to see that the sharp fall in the inflation rate which we have been forecasting actually happens before making any further decisions.

"But nevertheless, unless the economic situation improves, there is likely to be a strong case for extending the asset purchase programme after the current one comes to an end."

The £75m QE programme launched in October is set to be completed by February.

Howard Archer, senior economist at IHS Global Insight, said Weale's speech revealed some concerns the markets may have difficulty coping with increased QE at this stage.

IHS Global Insight forecasts the Bank of England to enact a further £50bn of QE in both the first and second quarters of 2012, taking the total to £375bn, and possibly even higher.

He added he did not expect interest rates to rise for some considerable time: "We do not expect any hike before mid-2013 and it currently looks eminently possible that the Bank of England could keep interest rates down at 0.50% through to 2014."