Photographer: Dan Kitwood/Getty Images

BOE’s Saunders Says U.K. May Be Stronger Than Economists Predict

  • Says rise in jobless rate would be an argument for lower rates
  • Saunders makes first public comments since joining BOE in Aug.

The U.K. economy may be set to weather its Brexit-induced slowdown better than many economists predicted, Bank of England policy maker Michael Saunders said in his first public comments since joining the central bank in August.

“In the near term, the next year or two, I think that the economy will slow but perhaps not slow as much as the consensus has been expecting,” Saunders said in an interview with the Financial Times published Tuesday. “This is partly because of the support from loose financial conditions” and “partly because of the underlying advantages” of the economy, he said.

Saunders’ comments add to evidence that policy makers are treating data cautiously since the U.K. voted to quit the European Union. After dropping in the immediate aftermath of the vote, gauges of business sentiment rebounded in August, and official data has surprised economists by remaining stronger than anticipated.

A rise in the jobless rate -- which has remained at an 11-year low since the vote -- would be an argument for lower rates, Saunders said.

Some Slack

“The economy still has some slack left in the labor market, you can see that in the subdued pace of pay growth,” he said. “If on the other hand we were to see signs that pay growth was accelerating significantly, for me that might be a reason to look for higher interest rates. If the jobless rate were to rise, increasing labor-market slack further, then that would be an argument in favor of lower interest rates.”

Officials said in the minutes of their meeting this month that while near-term data had been stronger than anticipated, they couldn’t draw inferences for their longer-term forecasts, and indicated that another rate cut could still be on the cards this year.

Saunders voted with other officials to keep all elements of a stimulus package introduced in August unchanged. Before he joined the nine-member panel, the central bank lowered interest rates to a fresh record, restarted bond-buying and introduced a new loan program for banks.

While he recognized the potential adverse effects from the central bank’s stimulus pushing gilt yields down, he said the benefits outweighed the negatives.

“I do understand the problems that many companies face with low gilt yields pushing up the record value of their pension deficits,” Saunders said. “But I think if the Bank of England were to refrain from QE out of these concerns then the effect would probably be that asset prices more broadly would weaken, the economy would be more sluggish and in the long run that might make pension deficits even worse.”

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