Bank Of England Saunders: Modest Rise In Interest Rates Justified

In a speech on Thursday, Bank of England external Monetary Policy Committee (MPC) member Saunders stated that terms of the trade-off between above-target inflation and below-potential output had shifted markedly in recent quarters.

Inflation had risen to well above target while spare capacity in the economy had been absorbed faster than expected.

In this context, there was little spare capacity in the economy and if the bank waits until wages growth reaches the target level, the economy would probably already be overheating.

According to Saunders, the prospective trade-off was beyond the limit of his tolerance with the likelihood of an extended period of above-target inflation.

Although there was no need to put the brakes on so much that the economy weakens sharply, a modest rise in interest rates would help ensure a sustainable return of inflation to target over time.

Although there was a high degree of uncertainty surrounding the Brexit process, Saunders stated that an overly loose monetary policy should not be maintained as insurance against a disorderly process. Instead, the bank should be prepared to respond if it happens.

Although there were no specific comments on forthcoming votes, the comments suggest he will continue to back an increase in rates.

Sterling recovered some ground after the comments, although it was still lower on the day and the impact was limited given that Saunders has already voted to raise rates at the previous two MPC meetings.

EUR/GBP edged lower to 0.9210 from 0.9220 with GBP/USD trading close to 1.2900. Gilts pared losses with only slight losses on the day.

Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.