Saunders Makes Case for Rate Hike After Carney Rattles Markets

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(Bloomberg) -- Bank of England policy maker Michael Saunders is sticking to his guns, arguing for further interest-rate increases the day after Governor Mark Carney came out with a surprisingly cautious outlook.

“We do not need to set policy in a way that will create rising spare capacity or higher unemployment. But our foot no longer needs to be so firmly on the accelerator,” Saunders said Friday in a speech in Glasgow after voting for an immediate rate hike last month. That “reflected a preference for an earlier tightening path than implied by the market curve.”

The comments contrast with Carney hinting on Thursday that market expectations for rate increases may be too high, at least for the next Monetary Policy Committee decision on May 10.

The BOE said in March that further rate hikes were likely needed over the coming years as spare capacity is eroded and domestically generated inflationary pressures gain steam, leading many economists to expect a tightening in borrowing costs next month.

Rate Expectations

Carney said in a BBC interview Thursday that policy makers will make their decision “conscious that there are other meetings” at which they could act this year. That was enough to shake confidence in a move in May, with market pricing dropping to less than 50 percent from more than 80 percent earlier in the week.

Both policy makers spoke after a week of mixed data. Unemployment fell to its lowest level since 1975 and wage growth picked up, though unseasonably snowy weather hit retail sales and inflation slowed to its weakest pace in a year.

While his vote at future meetings will depend on data and analysis of the economy’s prospects, he noted that the labor market will likely tighten further, “putting further upward pressure on domestic cost growth.”

Pound Fade

While the effect of the pound’s depreciation is starting to fade from headline inflation, that “may not have much implication either way for the inflation outlook two or three years ahead -- which is the main focus for monetary policy decisions,” he said.

Economic growth will probably remain just above its potential growth rate at 1.5 to 2 percent, though any increases in bank rate should be limited and gradual, Saunders said.

“‘Gradual’ does not mean that the exact timing of rate changes must be totally predictable or signaled in advance,” he said. “The MPC does not intend to create unnecessary uncertainty, and gives guidance -- based on our economic forecasts -- on the expected general outlook for interest rates. But I doubt that we will regularly use code words to effectively pre-announce policy decisions from meeting to meeting.”

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