(Bloomberg) -- Raising interest rates quickly may spare households an even worse squeeze on living standards, according to Bank of England policy maker Michael Saunders.
Addressing the Resolution Foundation think tank Monday, Saunders said he feared inflation expectations may take off unless the central bank acts firmly now.
Saunders was one of the minority of three members who voted for a half-point increase when rate setters met last week. The BOE raised rates by a quarter point to 1%, the highest level since 2009.
The BOE is grappling with soaring inflation, which it expects to hit a 40 year high of 10.2% in October, and weak growth, with economy forecast to shrink by 0.25% next year.
Saunders, who steps down from the nine-member Monetary Policy Committee in August, warned that inflation is “uncomfortably high” and failing to act swiftly “could require a sharper adjustment in monetary policy … and result in an even worse outcome for real incomes and living standards.”
Moving slowly may also jeopardize the BOE’s reputation, which is at stake given the scale of the inflation shock, he warned. “The MPC’s ability to use monetary policy to provide effective support to the economy in 2020 rested on the credibility of the inflation targeting framework. That credibility is not infinite and cannot be taken for granted.”
Saunders has voted for a half-point rate hike twice this year but said people should neither expect him to continue doing so or assume he thinks rates should peak any higher than market expectations in May of 2.5% early in 2023.
“My recent votes do not automatically imply that I would definitely vote for a 50bp hike. Nor do those recent votes necessarily imply that I believe the terminal rate will be above the yield curve used for the May monetary policy report,” he said.
Brexit Impact
The danger he sees is that rapid growth in consumer-price inflation could get embedded in wages, given the ongoing shortage in the jobs market.
Brexit is aggravating that problem by reducing the availability of labor, he claimed. Free movement of workers within the European Union had helped keep wages low. Since Covid, the migrant workforce has fallen back at the same time as older U.K. workers have dropped out.
“It is possible that Brexit has steepened the U.K. wage and price Phillips curves, by reducing the contestability of the U.K. labor and product markets, limiting the extent to which domestic capacity strains and specific skill shortages can be eased through imports and inward migration,” he said.
“It is too early to be definite about this but, if so, it could have increased the extent to which excess demand lifts pay and prices.”
Although aware that aggressive rate rises could harm the economy, he argued that inaction is the greater danger. “If we hike faster now and find the economy develops … to the downside, the Committee could reassess the policy outlook accordingly,” he said.
“That scenario is not my central expectation. But if it did materialize, I suspect we would be in a better position than now in terms of inflation expectations.”
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Raise Rates Fast to Avert Worse Pain, BOE's Saunders Says - BNN
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