Any quotes used must be attributed to Murnaghan, Sky News 

DERMOT MURNAGHAN:

Now to the economy, the worst financial crisis since the 1930s, possibly ever, declared the Bank of England Governor, Sir Mervyn King, this week. That as the Monetary Policy Committee pressed ahead with a new round of quantitative easing.  Well Martin Weale is one of the nine policy makers on the MPC and is with me now, a very good morning to you, Mr Weale.  I mean do you agree first of all with what the Governor has had to say about the scale and severity of this financial crisis?

MARTIN WEALE:

Well I certainly think that things are very difficult and if you look at Britain’s experience I think you can certainly say, as he did, that the crisis is possibly the worst ever.  In the 1930s Britain was in some sense a bit on the sidelines, the real problems were in Germany and in the United States.  Now, with greater financial integration we’ve been more affected by them. 

DERMOT MURNAGHAN:

What we saw in the 30s was the Great Depression, joblessness through the roof, trade grinding to a halt, relations between companies, protectionism, could it get that bad?

MARTIN WEALE:

If you look at how long it is likely to take for the economy to recover to the output level before the recession started, in the 1930s in Britain that was about four years.  Four years from the output peak now would take us to the first quarter of next year and I think very few people expect output to recover to its pre-crisis level by the first quarter of next year, so in that sense things are similar to Britain’s experience in the 1930s but, as I said, we have to remember that then other countries experience was very much worse than Britain’s.

DERMOT MURNAGHAN:

So are alarm bells now ringing on the MPC and from you personally, I mean for a long time the worry, from your point of view, was inflation, you thought that interest rates should be notched up but then you’ve changed your view over the summer and think that quantitative easing is now required. 

MARTIN WEALE:

Well I think if you look at the situation earlier in the year and indeed now, it is very reasonable to be concerned about inflation.  After all, our inflation target is 2%, the inflation rate is quite likely to pass 5% as a consequence of the increase in fuel bills that people are having to cope with but what we have seen since the summer is a sharp deterioration in Britain’s economic prospects and my guess is that had the interest rate been put up earlier in the year, I would probably have voted to reduce it and obviously the case for support has grown in the autumn as the financial situation has appeared to deteriorate. 

DERMOT MURNAGHAN:

So in your head is it a calculation of the balance of risks?  Clearly inflation, we know what that can do to an economy but it is better to risk inflation with more quantitative easing than to risk the alternative, the stagnation that may occur?

MARTIN WEALE:

Well I don’t see it quite like that.  I think everyone understands that the Bank can’t be expected to deliver the inflation target tomorrow, if we were to try and achieve 2% inflation in the very short term that would need a very tight squeeze on the economy and haven’t heard anyone thinking that that’s a good idea.  The horizon we work to is a two to three year horizon and with the economy having weakened now, that means that inflation prospects in two to three years’ time  are less worrying than I had thought they were and so that justifies a slacker policy.

DERMOT MURNAGHAN:

And is the biggest risk coming from the eurozone or from the United States?  We hear today that one of the troubled banks, one of the many troubled banks on the continent, Dexia, is holding a board meeting today and may well be facing some severe troubles tomorrow which could be the trigger for something pretty awful.

MARTIN WEALE:

Well, I think, no, one has to recognise that the financial system is now international so some United States banks have been having problems because of or at least people are aware of the risks that they face as the consequences of possible losses on lending to euro area countries.  If you look at the credit default swap premium, those have risen for some United States banks as well as for many European banks so it is an international issue.

DERMOT MURNAGHAN:

Do you think that there is a possibility though that the contagion, because we have seen our banks having a lot of their ratings downgraded by the credit ratings agency, that once again they could be in the firing line?

MARTIN WEALE:

Well the down rating by the credit ratings agency was not reflecting immediate problems, they said that.  What it was reflecting was the fact that in the past people had assumed that banks would be propped up by the tax payer, now we have seen the Vickers proposals to separate the sort of retail type banking from investment banking, so that tax payers future liabilities are limited now.  Obviously that makes investing in banks more risky than it was when one could assume that banks would be able to get anything they needed from the tax payer, so I think that’s what the downgrading is reflecting, it’s not reflecting problems with Britain’s banks.

DERMOT MURNAGHAN:

And what about this issue of quantitative easing, is this a bit of a shot in the dark in the hope that it can stave off whatever may lay in the future if you don’t do it?  Because £200 billion of quantitative easing already done by the Bank of England and we’re in this situation, does it actually work?

MARTIN WEALE:

Well the work that the bank has done on the issue has suggested that quantitative easing does support the economy.

DERMOT MURNAGHAN:

So things would have been worse if the £200 billion hadn’t already been pumped in?

MARTIN WEALE:

Well I think so.  Obviously there is uncertainty about the exact impact and equally we don’t know whether the impact in the future will be similar to what we think it was in the past but I have not heard anyone suggesting that quantitative easing actually inhibits the growth of the economy, that it fails to provide support.  Some people have suggested that it translates fairly directly into inflation without supporting economic growth and I can’t see any reason why that should be the case, I haven’t heard of a convincing mechanism why that should be the case, so the further quantitative easing is to provide further support for the economy.  Obviously the future is uncertain and we don’t know how much support will be provided but I certainly think it is an appropriate response to a weakening economic prospect.

DERMOT MURNAGHAN:

The last question, are you concerned on the MPC that you are running out of shots in your locker?  With interest rates already so low and have been for 31 months, more quantitative easing, there must be a limit to that.  If things really do get worse due to external factors, international factors as you described, there’s not much more that you can do.    

MARTIN WEALE:

Well there is quite a lot of scope for further quantitative easing.  No, before the purchases that we announced last week, the amount of government debt in the system was actually higher than it had been before the earlier bout of quantitative easing, so there is quite a lot more that could be done but at the same time I think one has to recognise that central banks can’t be expected on their own to resolve all of the world’s problems. 

DERMOT MURNAGHAN:

Mr Weale, thank you very much indeed, Martin Weale there from the Monetary Policy Committee of the Bank of England.