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

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