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MNI (London)
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
     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.
     "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.
     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
     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:
--MNI London Bureau; tel: +44 203-586-2225; email:
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