Bank must be bold to tame inflation, warns rate-setter

INFLATION risks being higher and dragging on for even longer than forecast if officials do not ramp up borrowing costs further, a top policymaker at the Bank of England has warned.

Michael Saunders said it was critical to get on top of inflation, which is already at 9pc, far in excess of the Bank’s 2pc target. Mr Saunders was one of three members of the Bank’s ninestrong Monetary Policy Committee (MPC) to vote for interest rates to go up to 1.25pc last week.

He said in a speech at the Resolution Foundation: “If monetary policy does not adequately lean against inflation pressures, then we may see a prolonged period of above-target inflation that causes longer-term inflation expectations to become further detached from the 2pc inflation target.”

Mr Saunders warned the energy price shock will be “painful”, but that it is caused by factors that are out of the Bank’s control. He said that even if policymakers had ended quantitative easing early last year – as he voted to do – it probably would not have had “much effect” on this year’s inflation surge.

The key is to make sure the Bank shows it is serious about tackling inflation now, he said, to stop “uncomfortably high” expectations running away.

However, he said some positive factors are pushing up inflation, such as low rates of unemployment, employers eager to retain workers, and families spending more of their savings and thereby supporting growth. But he said the jobs market is missing 440,000 workers, with a rise in the number of people off sick and a fall in migration.

If interest rates do not rise more now to combat soaring inflation, the Bank could be forced to put them up much more steeply in future, he said.

Mr Saunders added: “That could ultimately require a sharper adjustment in monetary policy and the economy to return inflation to target, and result in an even worse outcome for real incomes and living standards.”

Six of the MPC’S nine members voted to raise rates from 0.75pc to 1pc last week, taking borrowing costs to their highest level since 2009.

Most members forecast further rate rises will be needed in future, warning that inflation is expected to peak at more than 10pc this winter after energy prices rise by an estimated 40pc in October.

Mr Saunders said it is also crucial that the Bank is trusted to be able to get inflation back under control, as its credibility is important when it comes to boosting the economy in any future downturn.