Bank hawk Weale surprised by weak recovery

The Bank of England is seen behind a flower bed in the City of London April 11, 2011.

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

His comments add to signs that the momentum for raising rates has stalled after a batch of weak economic data and a surprise drop in inflation last month.

"First quarter GDP is likely to be weaker than many people, including myself, would have assumed," Weale told Reuters in an 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 rate that would suggest Britain's economy would have barely recovered from the shock 0.5 percent contraction at the end of last year.

First-quarter GDP data is due on April 27. Analysts have revised down their forecasts to a 0.6 percent expansion, according to the latest Reuters poll.

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

Sterling fell nearly half a cent against the dollar on Weale's comments and gilts rallied as investors pushed back expectations for Britain's first post-crisis rate hike.

"It's a big deal," said Richard Barwell, economist at RBS. "Weale sounds like a man backing off.

"Given that Spencer Dale has also said he could change his mind if GDP is weak, you could be in a situation in June when Sentance has left and there is no longer anyone on the committee voting for rate hikes."

Arch-hawk Andrew Sentance's term on the MPC expires at the end of next month.

RECOVERY CONCERNS

Weale said the recovery looked more fragile than past rebounds and would 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."

Weale said his voting decision next month would be guided by the Bank's updated quarterly growth and inflation forecasts.

"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. After a series of data disappointments and a dovish set of minutes this week, markets are no longer fully pricing in a rate rise until November.

Weale 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 fall in UK inflation to 4 percent last month was a surprise, but cautioned against reading too much into one month's figures. However, he was encouraged by falling inflation expectations and 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, Sentance called for a 50 basis point rate hike, Weale and 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 (members) are probably less far apart than the reporting of them might suggest," he said.

(Editing by Patrick Graham and Susan Fenton)