In a speech on Friday, external Bank of England MPC member Saunders suspected that there will be steady growth over the next 1-2 years with above-target inflation, stronger exports and a pick-up in business investment.
In Saunders’ view, the risk is weighted towards a somewhat steeper increase in inflation from Sterling depreciation than was expected in the February inflation report even with modest growth in wages. Overall, he would not be surprised if inflation hit 3.0% either in late 2017 or early 2018.
There is likely to be a slowdown in consumer spending growth, but this is likely to be offset by a stronger trend in exports and business investment. In this context, the economy could continue to register GDP growth rates around 2%.
According to Saunders, monetary policy at present remains clearly accommodative and there would still be a considerable stimulus in place even with a modest increase in interest rates.
Saunders also commented that the MPC does not need to delay any policy moves until there is certainty over the Brexit shape.
The overall tone of the comments was slightly hawkish, although he did not give any guidance on how he would vote at the May MPC meeting.
Given that the UK will be in the middle of an election campaign, a rate increase in May is unlikely, but there would be the possibility of more hawkish forward guidance.
Sterling edged higher after the comments, although GBP/USD remained below 1.2800 after the weaker than expected retail sales data released earlier and dipped lower at the US open.