Bank of England policymaker in call for rate rise
Akey Bank of England policymaker has said a “modest” interest rate hike is needed to curb surging inflation and warned over the dangers of getting “behind the curve”.
Michael Saunders – one of the Bank’s Monetary Policy Committee (MPC) members who has recently voted to raise rates – said an increase would “help ensure a sustainable return of inflation to target over time”.
In a speech in Cardiff, he said the trade-off of putting up with soaring inflation to boost the economy in the face of Brexit uncertainty was now “beyond my limits of tolerance”.
Mr Saunders added: “We do not need to be putting the brakes on so much that the economy weakens sharply.
“But our foot no longer needs to be quite so firmly on the accelerator, in my view.”
While Brexit could be a “bumpy” ride, the Bank should respond “as needed” rather than by keeping rates at the current all-time low of 0.25% in case risks to the economy emerge, he said.
He warned if early action is not taken, rate rises might end up being more dramatic to prevent the economy from overheating.
This could prove a shock to homeowners – many of whom have never had to face a rate rise.
He said: “In that case, the eventual tightening might be rather less limited and gradual than desired, leading to a more abrupt and painful economic slowdown.”
He added: “It would be preferable to have the space to move gradually, observing the effects as we go. If we get behind the curve, we lose that space.”
Mr Saunders has been among a minority on the MPC voting to raise rates to 0.5% in recent months amid inflation fears.
The MPC voted 6-2 to hold rates in August as lacklustre economic growth saw the majority opt against a hike.
But Governor Mark Carney signalled that borrowing costs may need to rise quicker than markets expect to cool inflation.
Inflation reached 2.6% as the Brexit-hit pound has sent the cost of goods and services soaring and the Bank predicts it will peak at close to 3% in October.
Mr Carney also warned the economy will remain “sluggish” as Brexit is hitting households and businesses.
At the Bank’s last inflation report in August, he said mounting uncertainty over the UK’s future relationship with the EU is holding back business investment and consumer spending.
The Bank cut its growth forecasts for this year and next to 1.7% in 2017 and 1.6% in 2018, from 1.9% and 1.7% predicted in May.
Mr Saunders echoed Mr Carney’s fears, saying Brexit could “undermine business and consumer confidence”.
“In such a scenario, inward migration might also be lower, limiting labour supply and demand. I presume asset markets would also adjust, including sterling,” he said.
But he said rates could “in theory go either way” depending on the impact on the economy and the pound and should not be kept at record lows now as “insurance against this scenario”.