BOE Rate Hike Needn't Be Delayed by Brexit, Saunders Says

Updated on
  • Says inflation may go over 3%, growth may exceed forecasts
  • Comments hint Saunders getting closer to supporting increase

The Bank of England doesn’t need to delay any policy changes because of Brexit if economic growth and inflation are stronger than expected, Michael Saunders said.

An increase in the benchmark rate would still leave policy in an accommodating stance, said Saunders, a member of the interest-rate setting Monetary Policy Committee. His comments, along with a positive assessment of the economy, suggest he’s among a group of BOE officials that are edging closer to voting for a rate increase.

“A modest rise in rates would still imply that considerable stimulus remains in place, helping to support output and jobs,” Saunders said at the Federation of Small Businesses in London on Friday. “I do not believe that the MPC is necessarily obliged to delay any policy moves until we have certainty over the exact shape of Brexit and its long-run effects on the economy.”

With the BOE about to go into a purdah period because of the general election in June, Saunders’s comments may be the last from an MPC member before the next interest-rate decision in May. While he said he wasn’t going to signal his voting intentions before that meeting, his hawkish comments provide clues to his thinking. 

He said the economy, which performed better than expected since the U.K. voted to quit the European Union, will grow faster than consensus forecasts this year and inflation could reach 3 percent by the end of the year. That compares with the BOE’s target of 2 percent.

Last Vote

The central bank kept the benchmark interest rate at a record-low 0.25 percent in an 8-1 vote last month, with Kristin Forbes supporting an increase to 0.5 percent. The record of the meeting showed there were some among the majority who said it wouldn’t take much more strength in inflation or growth for them to also shift their view.

Answering questions after the speech, Saunders said he doesn’t see himself wanting to add more stimulus, and the risks from hiking too early are about the same as from moving too late.

Economic growth is more likely to exceed forecasts than undershoot in the next few years, according to Saunders, though that could be impacted by a squeeze on consumers from the erosion of their real incomes. U.K. retail sales fell the most in seven years in the first quarter, data published on Friday showed.

The economy is also facing a fresh round of uncertainty as Prime Minister Theresa May called for an early general election in June. The government has two years to negotiate its divorce with European Union leaders, and while May has pledged to leave the single market and customs union, the U.K. is still enjoying access to the single market’s 440 million consumers. That, combined with the pound’s drop since the vote, is providing a boost to exports.

Labor Slack

While wage growth has been modest even amid low unemployment, Saunders said slack in the market is probably limited and the recent gains in productivity are unlikely to last.

“Overall, I suspect that the next year or two will see steady growth, above-target inflation, stronger exports, and a pickup in business investment,” he said, and while Brexit may damp the economy in the long run, the near-term adjustment may be different.

The BOE will publish new growth and inflation forecasts alongside its interest-rate decision on May 11.

“Perceptions of the economic outlook have already changed markedly in recent months and may well continue to do so,” he said. “It is natural for policy to respond to the changing outlook if needed, consistent with our low inflation remit.”

(Updates with additional comments in seventh pargraph.)
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