BOE Saunders: Backs Rate Hike; Brexit Policy Impact Uncertain

By David Robinson

     CARDIFF (MNI) - Bank of England Monetary Policy Committee member Michael

Saunders made the case for "a modest rise in rates" to get inflation back to

target and said that as the Brexit process could hit both supply and demand its

policy implications were uncertain.

     Saunders, speaking at a BOE Agents event in Cardiff, dismissed the view

that the risks around Brexit were a reason to postponing tightening. Instead, he

said that the trade-off between below-potential growth and above target

inflation had become intolerable, and the time had come to tighten policy to get

inflation sustainably back to the 2.0% goal.

     Saunders voted for a 25 basis point hike in Bank Rate at the August MPC

meeting and his remarks made clear that he has not changed his stance.

     "The prospective (growth/inflation) trade-off is beyond my limits of

tolerance, with the likelihood of an early elimination of slack and an extended

period of above-target inflation," Saunders said. 

     "Our foot no longer needs to be quite so firmly on the accelerator in my

view. A modest rise in rates would help ensure a sustainable return of inflation

to target over time," he said.

     One argument for delaying tightening has been that the UK's convoluted

process of withdrawing from the European Union could hit the economy hard.

Saunders, while not dismissing this risk, noted that it could prove to be a

supply side shock, which would push up on inflation so the impact on policy is

far from clear.

     "The Brexit process might be bumpy, and 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. The monetary policy implications of this scenario are not

automatic," he said.

     The prolonged weakness of sterling following the June 23, 2016 vote to

leave the EU has been very largely responsible for driving inflation above

target. Further Brexit uncertainty could well add to sterling's woes and sharpen

the dilemma for policymakers.

     "We should not maintain an overly loose stance as insurance against this

scenario. Rather, we should be prepared to respond as needed if it happens,"

Saunders said.

     In the August Inflation Report the MPC's central projection was that as a

result of sterling weakness CPI would stay above the 2.0% target throughout the

forecast period, all the way out to mid-2020. Saunders said that the MPC could

not ignore the inflation consequences of sterling's demise.

     "Monetary policy is not seeking to fully prevent the boost to consumer

prices from sterling's Brexit-related depreciation. But nor are we indifferent

to it," he said.

     Sterling, on its effective, or trade-weighted, basis is currently back

close to the lows seen in October 2016. 

     Saunders said that there had been a broad-based rise in inflation and some

increase in domestic costs and margins. 

     He said that the fall in headline inflation, from 2.9% in May to 2.6% in

July, "probably does not mark a turning point to lower inflation."

     Saunders was one of only two MPC members to back a rate hike in August and

he is the first to speak publicly ahead of the September meeting.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]