MNI: BOE Saunders -Backs Tightening; Q1 Slowdown Questionable

By David Robinson

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

Michael Saunders said Friday that the apparent UK economic slowdown in the first

quarter was of questionable significance, and he made the case for tightening

policy.

     Following comments by BOE Governor Mark Carney Thursday downplaying the

inevitability of a May rate hike, Saunders, who voted for a 25 basis point at

the March meeting, delivered a speech making the case for tightening.

     "With spare capacity largely used up and cost pressures rising, I believe

the economy no longer needs as much stimulus as previously," Saunders said in

his speech at the University of Strathclyde.

     Headlines in economic news have been about the deceleration in inflation in

the first quarter, which dropped below the MPC's central forecast, and softness

in some activity indicators.

     --SLOWDOWN SIGNIFICANCE QUESTIONABLE

     "Some recent data suggest that the economy may have slowed a little in Q1

... The significance of this apparent slowdown is, however, questionable,"

Saunders said.

     He noted that there is history of Q1 activity data being revised up over

time, and that business surveys point to steady growth.

     Saunders argued that the big picture of steady growth with spare capacity

disappearing remained untouched.

     "Overall, I suspect that economic growth in the coming year or two will

remain around its recent pace of 1.5%-2%, marginally above potential. Consistent

with this, surveys of firms' hiring intentions suggest that labour demand will

continue to outstrip labour supply," he said.

     --GRADUAL HIKES

     He argued that Bank Rate should be raised gradually from its current 0.5%

to around neutral and said that his vote for a 25 basis point increase at the

March meeting "reflected a preference for an earlier tightening path than

implied by the market curve."

     Since Carney's comments, market pricing suggests only a shade greater than

a 50% chance of a May hike, with Bank Rate rising towards 1.25% over three

years.

     Saunders avoided putting any precise estimate on the neutral rate, saying

it was unlikely to be static and he insisted that the MPC's commitment to

gradual tightening left it with plenty of scope to ease more or less rapidly.

     "Gradual does not imply that the MPC can only raise rates at a very low

frequency, such as once per year. Nor does "gradual" mean that the MPC cannot

tighten faster than markets price in," he said.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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