BOE Saunders: Hunch Growth To Be OK; Brexit Hit Longer Term

-Saunders Comments in London Evening Standard Newspaper

By David Robinson

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

Saunders said that while the UK's departure from the European Union may well

lower growth over the longer term, he had a hunch it would be OK for now.

     Saunders, in an interview with the Evening Standard published Friday, set

out his reasons for voting for a Bank Rate hike in August. He argued that

monetary policy could not offset the hit from Brexit to foreign direct

investment and with spare capacity reduced it would be normal to tighten if

there was an upside surprise to growth.

     Brexit "probably means the economy will grow several percentage points less

than it otherwise would do," Saunders said.

     If that Brexit hit amounted to, say, five percentage points of lost growth

over 15 years the loss would be sizeable, but not relevant to current policy

setting in Saunders' view.

     "Setting monetary policy, we're not trying to determine the outlook for

growth over the next 15 years, we're thinking about the next couple of years,"

he said.

     Monetary policy cannot prevent lower investment or a reduction in the

workforce as a result of Brexit, he said. Any shrinkage in the labour pool,

resulting in a tighter labour, would add to the case for higher Bank Rate.

     Asked what would make him back down from his call for a hike Saunders said

it would be if there was evidence that the economy was slowing sharply. While

the consumer side of the economy is clearly slowing, this so far has been offset

by the impact of net trade and higher investment.

     "My hunch, is that growth will be OK and the jobless rate will continue to

fall, and that's what motivated my view on rates," he said.

     Saunders was one of only two MPC members to vote for a rate hike at the

August meeting, backing a 25 basis point increase. The MPC offered no guidance

on the likely timing of the first hike and markets are currently assuming that

Saunders call for near-term tightening will be out-voted.

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

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