MNI POLICY: BOE Saunders: Makes Sense To Wait/See On Brexit

BOE Saunders Says UK Economy Has Slowed Significantly

By David Robinson

     LONDON (MNI) - The UK economy has slowed significantly and the current

sluggish growth rate is not likely to give rise to excess demand, BOE Monetary

Policy Committee member Michael Saunders said in a speech Wednesday.

     The following are key points from his speech at Imperial College Business

School:

     -Recent activity indicators have pointed to a marked deceleration in UK

economic growth, with output, orders and confidence all falling. Saunders said

that Brexit related uncertainty and softer global growth were driving the

deceleration.

     "Given that at present economic growth is probably not strong enough to

create excess demand and inflation is reasonably well behaved, for now it makes

sense to wait and to see how Brexit developments unfold," Saunders said.

     -The core of the policymaker's speech was on the impairment of the bank

lending channel. The cuts and rises in Bank Rate when the key policy has been

close to zero have had only marginal effects on mortgage and deposit interest

rates.

     Saunders said one factor has been that UK banks have not had to rely on

wholesale funding, having closed their funding gap. Instead, they can use

deposits to fund lending and deposit rates are sticky at close to zero.

     "Mortgage lending rates are now more sensitive to deposit rates and less

sensitive to wholesale unsecured funding rates. Hence, for as long as deposit

rates remain less sensitive to policy rate changes, rates on new mortgages may

also respond by less than usual to changes in Bank Rate," Saunders said.

     -The upshot is that policymakers may need to cut Bank Rate by more than

normal to have the same effect on the economy as they had previously.

     Saunders said that there appears to be "a zone of reduced policy

effectiveness" close to zero lower bound.

     "The MPC could allow for this issue by adjusting monetary policy slightly

more actively (when the policy rate is low) in order to produce a desired impact

on the economy," he said.

     If Bank Rate was, for example, at 1.0% or its current 0.75% and the MPC

wanted to add stimulus "it would be more appropriate to cut a bit further than

usual," Saunders said.

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

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