The MPC member on why he voted for a rise – and why policymakers should not hold fire during Brexit talks
Households should prepare for interest rates to rise as the Bank of England withdraws some of the emergency support it injected into the economy in the wake of last year’s Brexit vote, a top policymaker has warned.
Michael Saunders used a Guardian interview to explain why he had voted for a rate rise last month and to emphasise that it was no longer necessary for Threadneedle Street to keep its foot to the floor with record low borrowing costs.
The external member of the monetary policy committee (MPC) said the economy had confounded gloomy forecasts made in the aftermath of the referendum and he warned inflation would climb higher and stay well above the Bank’s target for longer without action.
“I think households should prepare for interest rates to go higher at some point. But if rates do go up, it will be in the context of the economy doing OK and unemployment being low and probably falling,” he said.
Speaking on the eve of the 10th anniversary of the last time the Bank raised interest rates, Saunders rebuffed suggestions that policymakers should hold fire while Brexit negotiations get underway.
“We are not constrained from adjusting interest rates during the Brexit period. There’s no sense that policy has to stay on hold just because Brexit negotiations are under way,” he said.
The Bank slashed interest rates to an all-time low of 0.25% and unveiled a package of measures to shore up the economy in the wake of the Brexit vote. At the time it predicted the economy would grind to a halt by the end of 2016. In the event, resilient consumer spending helped power growth and the UK was one of the best performing advanced economies in the world.
Saunders watched that August rate cut from home while on gardening leave. He had left his job at the investment bank Citigroup, where he had been an economist since 1990, after his appointment to the MPC was announced in April 2016. He joined the committee three days after August’s emergency Brexit package was unveiled.
In June, he was one of three MPC members voting to raise rates to 0.5%. Against the backdrop of a consumer squeeze and sharp slowdown in growth, they were outvoted by the five other policymakers, including governor Mark Carney.
But since then, Carney and the Bank’s chief economist Andy Haldane have suggested they are more open to higher rates. Saunders hints he will vote again for a rise at the next meeting in August.
“At the moment, in monetary policy terms if you like, our foot is pretty much on the floor with the accelerator. Record low policy rate, large stock of quantitative easing, and I don’t think the economy needs as much stimulus as that,” he said.
The pound’s sharp fall since the Brexit vote has left the Bank with a tricky balancing act. A weaker pound has made imports more expensive and pushed inflation well above the Bank’s 2.0% target to 2.9% on the latest figures. But household budgets have suffered as wages have failed to keep pace with inflation and consumer spending has slowed, knocking overall GDP growth.
Saunders predicts inflation will rise further and the trade-off for the Bank between supporting jobs and growth and keeping inflation in check has shifted. Now there was a risk of acting too late to curb rises in costs.
“To me this is the time when you don’t take the punch bowl away fully but you just start to edge it away,” he said. “The risk that you run with maximum stimulus is that the jobless rate keeps falling then at some point if pay growth picks up you have to reverse course very sharply. It would then be much harder for tightening to be limited and gradual. You’d be having to play catch-up.”
Saunders says his visits to businesses around the country have highlighted firms’ growing difficulty in hiring staff from overseas. That could well push up wage growth, he feels.
“There has been this extra pool of labour which firms can call on and most of the rise in employment, the overwhelming part of the rise in employment of the last five years has been from people born outside the UK,” he says. “It’s clear from talking to firms that it’s getting harder to persuade people to come to the UK.”
Another factor pushing him towards higher rates are signs that exports are “doing really well” and investment intentions have picked up. “I am reasonably confident that the pick-up in investment and exports will roughly balance the consumer slowdown,” he said.
But even if that is enough to convince most of his MPC colleagues to vote for a hike this year, Saunders cautions against over-reacting. “If rates were to rise to 0.5%, policy would still be pretty loose. We would still be providing plenty of stimulus, continuing to support output and jobs.”
Source: The Guardian
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