BoE's Weale says labour market slack suggests tighter rate policy needed

LONDON, June 18 (Reuters) - The Bank of England may be overestimating the amount of slack in Britain's labour market, pointing to a need for tighter monetary policy than it forecast in May, one of its policymakers said on Wednesday.

Martin Weale, an external member of the BoE (Shenzhen: 000725.SZ - news) 's Monetary Policy Committee, said the Bank could afford to tighten monetary policy slightly even if slack in the economy was greater than labour data currently suggest.

While acknowledging that wage growth was still unusually weak, monetary policy would still provide a great deal of support for the economy even after interest rates have started to rise gradually, said Weale in a speech in Belfast.

He said the measures of underemployment that contributed to the BoE's view of labour market slack in its inflation report in May in his view overstated the amount of spare capacity in the labour market.

Weale - known as one of the most hawkish members of the MPC - cited his own research that workers who were recently unemployed are less productive than average.

"If this is the case, then, as the economy continues to grow, unemployment could fall more quickly than the MPC (KOSDAQ: 050540.KQ - news) expects. That on its own certainly points to a need for policy profile tighter than in our May forecast," he said.

Minutes from the MPC's June meeting on Wednesday showed policymakers were surprised that markets had not priced in a higher chance of an interest rate rise this year.

BoE Governor Mark Carney shocked markets last week by saying that a rise in interest rates could come sooner than markets had expected.

Weale underlined how balanced the case for tightening monetary policy was.

"I am sure we will all take note of the way that the (average earnings) data for April ... reinforced this sense of unusually low wage growth," he said.

In the three months through April, total pay including bonuses rose a yearly 0.7 percent, slowing from 1.9 percent in the three months to March. In the month of April alone, total pay fell by 1.7 percent compared with the same month last year. (Reporting by Ana Nicolaci da Costa (NasdaqGS: ATX - news) and Andy Bruce; Editing by Hugh Lawson)