MNI POLICY: BOE Saunders Calls For Aggressive Policy Response

-Cost Of Too Much Stimulus Lower Than Cost Of Too Little

By David Robinson

     LONDON (MNI) - On risk management grounds alone, it would better for the

Bank of England to do too much, rather than too little in response to the impact

of the Covid-19 pandemic, Monetary Policy Committee member Michael Saunders

argued Thursday. 

     Saunders WAS one of two MPC members who voted for GBP100 billion in extra

asset purchases at the May meeting and the committee is widely expected to

support further easing at June's meeting. 

     The MPC would have time and the policy tools to re-tighten policy if it

overdid the stimulus but that costs could be high if it did too little, he added

in his speech in London.

     The following are points from his speech and following Q and A:

     -Saunders said that it was not possible to be precise about the balance of

risks at present but that the costs of a prolonged, slow recovery from the Covid

shock would likely be higher than any costs from overheating the economy.

     "It is safer to err on the side of easing somewhat too much, and then if

necessary tighten as capacity pressures eventually build, rather than ease too

little and find the economy gets stuck in a low inflation rut with increased

hysteresis costs," Saunders said.

     -Saunders warned of the scarring effects from prolonged, high unemployment.

He said that the MPC's central scenario may be underestimating the extent of the

scarring that could occur and its hit on potential, or non-inflationary, GDP

growth. In the Bank's May Monetary Policy Report scenario the level of potential

GDP three years ahead is shown to be 1%-2% lower than in its most recent

pre-Covid forecast. 

     "In my view, that would be a relatively benign outcome. Research based on

prior recessions suggests that scarring effects could be much larger, especially

given the likely scale of the drop in GDP and employment in Q1 and Q2," Saunders

said.

     -He made no reference to setting negative Bank Rate or extending purchases

to riskier assets in his speech, instead talking about increasing current asset

purchases. 

     In the Q and A he was asked repeatedly about policy alternatives to more

QE, including negative interest rates and yield curve control. He was guarded in

his responses, saying that there were pros and cons to yield curve control and,

as with negative interest rates "I wouldn't want to rule it out but would not

necessarily want to rule it in."

     "We review all aspects of our policy toolkits and seek to learn from the

experiences of other countries," he added.

     -In response to an MNI question on how he squared the risks of high

unemployment and lower potential GDP with falling into a low inflation trap, he

said that high joblessness and low spending could be self-reinforcing and that

the UK could end up with both.

     -On inflation he was asked why if the global financial crisis (GFC) was

inflationary for the UK he thought the Covid crisis would be disinflationary.

Saunders said that the GFC was disinflationary for wage growth and domestically

generated inflation, and only net inflationary because of the sharp fall in

sterling.

     "This time around what we have seen is an adverse shock to supply, I think

a bigger adverse shock to demand, which is why inflation has fallen, and the

exchange rate hasn't done so much and so the disinflationary domestic effects

are dominating," Saunders said. 

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

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