MNI POLICY: 'Quite Likely' Need More BOE Easing: MPC Saunders

The Bank of England will likely need to ease policy further to overcome a slower recovery and deeper scarring of the economy than previously thought, Monetary Policy Committee member Michael Saunders said Friday.

"I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2% target," Saunders.

"My hunch is that risks lie on the side of weaker growth and a longer period of excess supply than forecast in the August MPR, and hence of a more persistent inflation undershoot," he noted.

When asked in a Q&A session what form additional stimulus would take, more quantitative easing (QE) or negative interest rates, Saunders tilted to the former.

"QE is clearly an option, there is certainly scope to expand that. On negative rates we are reviewing whether they would be a useful form of stimulus at present. We have said that they are in the toolkit but there are still questions as to whether it would be a useful form of stimulus," he said.

SCARRING

Saunders said that the realisation of a downside scenario would increase long term scarring on potential growth, a point made by his colleagues at the Treasury Select Committee Thursday.

Covid-19 infections could persist for much, if not all, of the Bank's three year forecast horizon, he added, noting that the government's latest approach of local lockdowns came with the new problem that unlike the national lockdown, these were not cushioned by fiscal support and could result in a higher degree of precautionary saving.

Asked about the MPC's central forecast that unemployment would rise to 7.5%, which is markedly lower than some forecasts, Saunders said that there was high uncertainty around that number.

What mattered, he said, was not the precise number but that "the likelihood is unemployment is going to rise very sharply in the next few quarters."

TIGTHER RETAIL MONETARY CONDITIONS

Saunders also acknowledged that the mortgage market has seen tighter lending terms and some higher interest rates, entailing that for some consumers at least monetary conditions have tightened not eased recently.