BOE Saunders: Sterling Fall Part Due Better EZ Growth Outlook

-Saunders: MPC Hasn't Lost Ability To Push Up Rate Expectations; Never Had It 

By David Robinson

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

Saunders said Thursday that the latest bout of sterling weakness was in part due

to improved euro area growth prospects, which would be beneficial for the UK

economy.

     Saunders, in a question and answer session following a speech in Cardiff,

said that UK exports had picked up broadly as expected given the fall in

sterling and the improvement in global growth and that renewed sterling weakness

was likely to push up inflation and further improve export performance.

     "The exchange rate does what it does and we react accordingly. We have to

try and understand why the exchange rate is moving and what are the factors

behind it," Saunders said when asked about his concerns over sterling's fall.

     "Part of the recent depreciation, just in the last month or two, is the

perception of better European growth, so the euro has been strengthening and the

pound has been falling by comparison," he added.

     That underlying change "is one that is helpful for UK growth."

     "At the margin that drop in the exchange rate would help to lift inflation

and it would help to improve export prospects ... so we try and feed all of that

in," he said.

     Sterling has fallen on its effective rate index to levels last seen in

October 2016, and is close to its post-EU referendum lows.

     Saunders, who voted for a 25 basis point rate hike at the August MPC

meeting and set out his arguments for continuing to support tightening in a

speech here, was asked if the MPC could make smaller rate increases of, say, 10

basis points.

     "In theory we could move interest rates by whatever margin we would like -

one basis point. But the effect on the economy of a 25 basis point rise is

pretty small," he said.

     "I suspect that small steps might add more confusion," he added.

     One reason for backing tightening is that UK productivity has remained

exceptionally weak by historic standards, so any rise in output is potentially

inflationary.

     Pre-global financial crisis productivity growth was typically around 2% but

"post-crisis it has been about half a percent" so in theory there should be

catch-up, Saunders said.

     "I see no sign at the moment that that productivity catch-up is coming

through ... The growth of productivity in the first half of the year actually

weakened," he said.

     An early indicator of rising productivity would be that firms' demand for

staff would be weaker than their expected output growth but Saunders said that

this was not visible and he expected the labour market to continue to tighten.

     Saunders was asked by Market News International if the MPC had lost the

ability to talk up market rate expectations, as yield curves flattened after the

August Inflation Report and minutes despite the MPC stating that policy could

need to be tightened more than the curves had been implying.

     "I am not sure that we ever had the ability to move the markets around ...

markets do what markets do and I don't judge the success or failure of our

communications by what markets do on the day," Saunders said.

     "We give you some guidance on where monetary policy might go if the economy

evolves as expected. If markets chose to take a different view that is up to

them ... I am not sure we ever had the ability that you would like to ascribe to

us," he said.

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

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