A second member of the Bank of England’s interest rate-setting committee dropped a heavy hint on Thursday that he would vote to tighten monetary policy at the next meeting on August 5.
Michael Saunders, an external member of the Monetary Policy Committee, said that action to curb inflation should be taken before the effects of removing the UK’s furlough scheme in September were evident.
He is the second of the nine MPC members to suggest monetary policy should be tightened following the surprise upward march of inflation to 2.5 per cent in June, in figures published on Wednesday.
Soon after the figures were published, Sir Dave Ramsden, a deputy governor of the central bank, warned that the BoE was likely to need to tighten policy “sooner” than previously thought.
Saunders said that so long as the current trends continued over the next few weeks, “it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2 per cent target on a sustained basis”.
“Options might include curtailing the current asset purchase programme — ending it in the next month or two and before the full £150bn has been purchased — and/or further monetary policy action next year,” he added in an online webinar.
Saunders will be regarded as a significant voice to air hawkish views as he has been known to favour extremely loose policy during the pandemic.
Saunders and Ramsden’s views contrast with BoE governor Andrew Bailey’s insistence before the latest shock inflation figures that the bank was not “whistling in the wind” while inflation rose out of control and it was right to do nothing to curb price rises.
In his speech, Saunders highlighted why he disagreed with the governor’s stance of early July. He forecast that inflation was likely to rise close to 4 per cent by the end of the year before moderating, but that the rise increased the risks that higher inflation would become persistent.
“A modestly tighter [monetary policy] stance . . . would help ensure that inflation risks two to three years ahead are balanced around the 2 per cent target, rather than tilted to the upside (which I suspect is the case with the current policy stance),” Saunders said.
This would ensure a smooth change in policy and be “more akin to easing off the accelerator rather than applying the brakes”, he added, saying that he thought the conditions the MPC had set for tightening policy had now been met.
Saunders added that there was no point in waiting until the full effects of ending the furlough scheme were known because that would mean waiting until at least February before taking action and would “would exacerbate risks that inflation expectations drift higher in coming months”.
“For me, the question of whether to curtail our current asset purchase program early will be under consideration at our forthcoming meetings,” Saunders said, although he cautioned that this was not an announcement of his voting intentions.
Source: Economy - ft.com
