U.K. Economy Will Grow More Than BOE Forecast, Saunders Says

(Bloomberg) -- The U.K. economy will likely grow more next year than the Bank of England forecast in August, policy maker Michael Saunders said in his first public speech since joining the central bank.

Growth next year is “more likely to be clearly above 1 percent rather than (as the consensus expects) below 1 percent,” he said in a speech to be delivered Wednesday in Manchester. “Unless Brexit-related uncertainties rise sharply and/or global conditions disappoint markedly, I suspect that the U.K. economy will be not too bad in the year ahead.”

His comments add to signals that the BOE may revise up its growth estimates on Nov. 3 when it announces its next policy decision. In August, the central bank said growth would slow to 0.8 percent next year as it cut its benchmark interest rate for the first time in seven years and pledged an additional 170 billion pounds ($217 billion) of monetary stimulus in the wake of the decision to quit the European Union. 

Since then, the economy has performed better than many expected and traders increasingly expect the BOE to refrain from another rate cut in the coming months.

Brexit Effect

Saunders does expect Brexit to have a “modest adverse effect” on long-run growth. However, he cited the U.K.’s relatively loose financial conditions, the boost to exports from the pound’s weakness and a rebound in consumer confidence as factors that may help limit the economic fallout.

“Housing activity, in particular, may be less vulnerable to heightened uncertainty than the MPC’s August forecast implies, especially given the substantial backlog in housing demand and record-low level of mortgage rates,” he said.

The labor market, on the other hand, is likely to see more subdued growth in pay and unit labor costs than the Monetary Policy Committee’s central forecast and the economy’s natural jobless rate is likely below the 5 percent estimated by other officials, he said.

Saunders joined the MPC days after the new round of stimulus was announced and he voted in September to keep all elements of the package unchanged. In his speech, he said that that while the bank has limited room to cut bank rate further, “substantial scope remains for stimulus through asset purchases.”

QE Option

In a speech examining the trade off the BOE currently faces between higher inflation and slower growth, Saunders ran a number of calculations to search for the “optimal” interest-rate path that balances equally the deviation of price-growth from target and the output gap in different hypothetical scenarios. In one he considered lowering the benchmark rate to zero and implementing an additional 280 billion pounds of quantitative easing.

He said his decision in November will depend on the data, weighing his assessment that the economy has more slack than the BOE forecast against the possibility it is also growing more strongly.

“My policy vote will probably depend on which of these factors is dominating,” he said.

To contact the reporter on this story:
Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story:
Fergal O'Brien at fobrien@bloomberg.net
Lucy Meakin, Andrew Atkinson