One of the Bank of England’s rate setters has warned that inflationary pressures are “uncomfortably high” and that it would be “very costly” for the UK economy if the central bank failed to rein it in.
Michael Saunders, one of the four external members of the BoE’s Monetary Policy Committee, told the Resolution Foundation think-tank in London on Monday that he wanted monetary policy to stop stimulating economic activity.
After voting in the minority for a 0.5 percentage point hike last week, Saunders said he thinks the BoE’s main rate “should rise relatively quickly towards a more neutral stance to prevent the recent trend of higher inflation expectations.” and increasing wage increases more firmly embedded”.
The majority on the committee voted for a quarter-point increase to 1 percent.
Saunders declined to clearly define his view on the neutral interest rate, where the cost of borrowing neither stimulates nor seeks to dampen economic activity. But he hinted that it could be in the range of 1.25 percent to 2.5 percent.
He noted that financial markets did not expect CPI inflation to fall back to 2 percent if interest rates were in that range.
Rather than follow BoE Governor Andrew Bailey’s rhetoric of a “carefully calibrated” response to high inflation, Saunders emphasized the risks of doing too little to contain inflationary pressures in the UK economy.
He noted that spending has held up well, firms expect to hike prices significantly in the coming months and domestic prices for core services have risen almost twice as fast as the BoE’s inflation target of 2 percent.
Unfortunately, the UK economy’s ability to cope with high spending is more limited, Saunders added, as long-term sickness rates have risen sharply since the start of the pandemic and supply shortages have emerged as a result of Brexit.
“We should lean heavily against them. . . risk [of inflation being persistently too high]because if it does happen – in my view a risk that cannot be ignored – then the process of re-anchoring price expectations [to the 2 per cent inflation target] could be very costly economically,” Saunders said.
If the economy worsens and inflationary pressures ease, the MPC could “quickly reassess” monetary policy’s stance, he said.
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The most likely cause of interest rates rising into a zone where policymakers were actively trying to cut spending and raise unemployment would be if the BoE takes too little action now. In these circumstances, it would be obligatory to drive inflation out of the economy later, Saunders said.
“I’d rather not be in that scenario,” he added.
Saunders’ sharp comments came as Andy Haldane, the former BoE chief economist who now heads the Royal Society for Arts, took to the airwaves to criticize his former colleagues for acting too slowly to fight inflation.
“That [inflationary period] won’t come and go in a few months. I think this could take years rather than months,” Haldane told LBC radio on Monday, adding that the inflation outlook is “approaching” 1970s levels.
Haldane added: “Well, to put it bluntly, no amount of earlier slamming on the brakes would have completely averted the cost of living crisis we’re getting. That’s ours anyway, but I wish we’d done a little more a little earlier to streamline things.
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