Safer for BOE to Ease Too Much Rather Than Too Little, Saunders Says

(Bloomberg) -- It’s safer for the Bank of England to ease too much rather than too little as it responds to the coronavirus pandemic, according to policy maker Michael Saunders.

The U.K. is at risk of a relatively slow recovery from the crisis, which could prove especially damaging, Saunders said on a webinar Thursday. Failing to add more stimulus now could see the economy slip into a “lowflation trap.”

The pound weakened after the comments, which show how momentum is building behind more monetary easing as soon as next month. Saunders was one of two policy makers that wanted to expand asset purchases in May. While the majority wanted to wait, they accepted more easing might ultimately be needed. Since then, others, including Governor Andrew Bailey, have indicated additional measures could be on the way.

“The costs of policy error are, to an extent, asymmetric at present,” Saunders said. “It is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low-inflation rut.”

The comments on the outlook echo those made by Bailey, who said Wednesday the U.K. faces a protracted recovery from the coronavirus crisis. That view appear more downbeat than a scenario published by the central bank earlier this month which foresaw a relatively rapid bounce back from the initial hit of the virus.

The speech is Saunders’ first since Covid-19 hit the U.K., prompting the central banks to slash interest rates to a record low 0.1%, expand bond buying and step in to boost capital.

The pound slid 0.2% to $1.2241, while money markets moved to price in a 10 basis-point interest-rate cut for May 2021.

The virus has prompted an intensifying debate over whether the BOE could eventually cut borrowing costs rates to negative levels. Members of the rate-setting Monetary Policy Committee have refused to rule out any tools, even as they stress such a move isn’t imminent.

Bailey wrote in the Guardian on Wednesday that the central bank is right to consider lowering rates “into unprecedented territory” among possible options, but also to pay attention to any risks that such a policy might throw up.

Saunders said that he didn’t have anything to add to Bailey’s comments, and that negative rates require careful assessment. He wouldn’t rule the policy in or out, he said.

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