BOE May Not Wait for Brexit Clarity to Hike Rates, Saunders Says
(Bloomberg) -- The Bank of England doesn’t have to wait until all political uncertainty around Brexit is resolved to raise interest rates, according to policy maker Michael Saunders.
The economy will probably move to “significant excess demand” over the next two to three years if Brexit goes smoothly, Saunders said, and will need monetary tightening as a result. Consumer spending will also likely be stronger than the BOE’s last forecasts indicate, he said.
Saunders, who is known as one of the more hawkish members of the central bank’s nine-member Monetary Policy Committee, has led calls for higher rates in the past. His comments are a warning that policy makers may look past unexpectedly weak economic growth so far in the second quarter. Markets aren’t pricing in a hike until well into next year.
“The MPC does not necessarily have to keep rates on hold until all Brexit uncertainties are resolved,” Saunders said in a speech in Southampton, U.K. “The MPC has already raised rates twice since the Brexit vote. We will act again if needed to ensure a sustained return of inflation to target over time.”
Governor Mark Carney said during the BOE’s last Inflation Report that the central bank stands ready to raise interest rate by more than investors were predicting if the U.K. successfully manages a smooth exit from the EU.
There would be a cost in waiting too late to increase interest rates though, Saunders said, “until all the potential warning signs across pay, capacity and prices are flashing red.” That would increase the likelihood of a painful adjustment and could endanger the guidance that rate rises will be limited and gradual, he said.
Still, Saunders said he isn’t committing to voting in a particular way at any particular meeting, with the BOE’s next decision due to be announced on June 20.
Data released Monday showed a larger-than-expected slowdown in growth and a big drop in factory output in April. The National Institute of Economic and Social Research said the economy is likely to contract 0.2% in the three months through June.
Saunders said that the April weakness was due to an unwinding of inventory stockpiles from the first quarter, which had been anticipated by the BOE.
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