Rates need to rise soon, warns Bank policymaker

A key policymaker at the Bank of England has hinted at his support for a rise in interest rates because he anticipates that economic growth and inflation are set to exceed expectations.

Michael Saunders, an external member of the Bank’s Monetary Policy Committee, said that he thought the headline rate of inflation was likely to reach 3 per cent by the end of 2017 and it was “natural” that the central bank’s policy should respond accordingly.

The former head of European economics at Citigroup said that because there was little slack now left in the labour market and “slim” evidence of a productivity pick-up, a “modest rise in rates would still imply that considerable stimulus remains in place, helping to support output and jobs”.

Mr Saunders, who joined the MPC last April, said he was not prejudging how he might vote in the future on monetary policy and it will be useful to see more data on how the economy is faring, but his comments are likely to change his image as one of the more dovish members of the committee.

Speaking to the Federation of Small Businesses, Mr Saunders said that any rate rises would need to be “limited and gradual” but added that such a move would not cause damage to the outlook for the UK economy.

The policymaker said the fall in the pound since the Brexit vote was still passing through to inflation, which remained at a three-year high of 2.3 per cent in March, and the rise in consumer prices was likely to increase faster than the Bank’s estimate of 2.75 per cent by the end of the year. “I would not be surprised if CPI inflation reaches 3 per cent later this year or early next.”

However, he added that the sudden sharp rise in consumer prices does not mean that a post-Brexit Britain will face “persistently high inflation” or that the Bank had gone soft on its remit of keeping inflation about 2 per cent. “Over time, the appropriate monetary policy can and will ensure that inflation returns to the 2 per cent target, consistent with our remit,” he said.

If Mr Saunders voted for a rate rise at next month’s MPC meeting he would join Kristin Forbes in looking to increase rates from their record low of 0.25 per cent, but financial markets do not expect a rise until the end of 2018.

Mr Saunders acknowledged that the Bank and other global economic institutions were wrong in their forecasts around Brexit, having expected the economy to slow markedly within the first six months of a vote to leave.