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