In a speech delivered at a Doncaster Chamber of Commerce lunch yesterday, external MPC member Martin Weale said Europe’s debt problems were hampered because financial markets had not exerted as much discipline on large borrowers as was hoped when the currency union was planned.
“To any casual observer it is obvious that there is a tension between the market pressures for much greater support and the political problems this pressure gives rise to in a number of countries in the euro area,” he said. “The result is political uncertainty about how the issue will be resolved and this is itself a source of economic instability.”
Weale said there was “undoubtedly scope” for further asset purchases to trigger further reductions in yields on government debt should the need arise.
“The resulting capital gains will provide support to consumption and a general reduction in the term structure of interest rates is likely to lead to knock-on capital gains on other assets which will provide further support to consumer spending,” he said. “Higher asset prices and lower interest rates are also likely to support business investment. The extra demand which results will both support output and help to underpin the rate of inflation.”
However, Weale said he did not think there was a case for further asset purchases by the MPC and that a further reduction in bank rate was unlikely.
