Photographer: Chris Ratcliffe/Bloomberg

BOE’s Saunders Says Inflation Key as Pound Drop Pushes Up Prices

  • BOE policy maker appears at appointment hearing in London
  • Saunders previously worked as economist at Citigroup

Bank of England policy makers aren’t concerned about short-term volatility in the pound but are watching the impact on consumer prices, Michael Saunders said.

“You’re going to have an inflationary effect coming through in the next two-to-three years from the drop in the pound,” Saunders, a newly appointed member of the BOE’s Monetary Policy Committee, told lawmakers in London on Tuesday. If the pound falls about 20 percent “you probably expect see import prices in the U.K. rise perhaps 12-13 percent” and lift the level of consumer prices by 4 percentage points over three or four years before the effect fades, he said.

Michael Saunders

Source: Bank of England

Sterling has slumped almost 18 percent to a three-decade low since the U.K. voted on June 23 to leave the European Union. It was down 0.7 percent at $1.2273 at 12:55 p.m. London time.

The currency’s slide is a reflection of concern about Brexit as well as the current-account deficit, Saunders said. In separate written testimony, he said he wouldn’t be surprised if the currency were to weaken further but is “agnostic” on the matter.

Inequality Charge

Saunders, who joined the MPC in August, also reiterated that he believes the U.K. economy will likely grow more next year than the BOE forecast, although it is too soon to gauge the long-term effects of Brexit. He replaced Martin Weale as one of four so-called external members of the nine-member committee just days after a new round of stimulus, including an interest rate cut and quantitative easing, was announced on Aug. 4.

Criticism that the BOE’s measures widen wealth inequality has been stepped up since that package. Prime Minister Theresa May said last week that ultra-loose monetary policy has had “some bad side effects.” Saunders acknowledged the distributional impact of the stimulus, while saying it still benefits the economy as a whole.

While in theory the BOE could come to a “tipping point where adverse effects of QE might cancel out the positive effects,” he said that has not yet been reached. He voted in September to keep all elements of the central bank’s policy package unchanged.

More Ammunition

The MPC will present new growth and inflation forecasts when they announce their next rate decision on Nov. 3. Traders see chances fading for a further rate reduction next month, with futures contracts indicating a probability of 9 percent, down from 17 percent after the last meeting.

Less than three weeks later the government will publish its Autumn Statement, which is expected to contain new measures to bolster the economy. Saunders said a looser fiscal policy has implications for monetary policy.

Even so, in his testimony, he rebuffed the suggestion that the central bank is nearing the limits of its own capabilities.

“I don’t agree” that we’re out of ammunition, he said. “If we were, I’d say so.”

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