MNI: BOE Saunders: Stimulus Needed To Avoid Low Inflation Trap

By David Robinson

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

Saunders said that the UK risks falling into a low inflation trap and advocated

monetary easing.

     Saunders said the UK has been suffering from a prolonged period of sluggish

growth, that activity has slowed further and that the next leg of downturn may

be underway. The MPC has only limited scope to boost the economy, with Bank Rate

at 0.75% and quantitative easing likely to be less effective than in the past,

he said, calling for policymakers to act.

     Following are key points from his speech:

     -While the UK was not trapped right now "you just have to look across other

major advanced economies to appreciate that the risk of being stuck in a low

inflation trap, with a self-reinforcing circle of caution, sluggish growth and

depressed inflation expectations, is not just a theoretical possibility."

     -"With limited monetary policy space, risk management considerations favour

a relatively prompt and aggressive response to downside risks at present," he

said.

     -Saunders voted for a 25-basis-point cut in Bank Rate in November and

December. He said would not pre-announce his January decision.

     Nevertheless, his comments made clear his support for easing, and he cited

the possible need "to cut rates further, in order to reduce risks of a sustained

undershoot of the 2% inflation target."

     -Saunders backed the view, associated with the Fed's Charles Evans among

others, that policy risks are asymmetric near the effective lower bound.

     A rate cut which turns out to unjustified can be easily reversed, but if

policy is kept tight for too long policymakers can find themselves struggling to

get the economy out of a trap, with no scope for further rate cuts.

     Saunders endorsed his colleague Gertjan Vlieghe's view that QE may be less

effective now than it was at the start of the financial crisis.

     -He highlighted the weakness of the economic outlook at present, saying "to

sum up on the current situation, economic growth is sluggish, spare capacity is

rising, while inflation is subdued.

     "Unless prospects for demand improve very quickly, some increases in

unemployment (or under-employment) seem likely in the next few quarters."

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

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