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By Andy Bruce
LONDON, Oct 4 (Reuters) - New Bank of England rate-setter Michael Saunders said Britain’s economy was probably growing faster than his colleagues expected in August, but that he had not decided how to vote on policy next month because of slack in the labour market.
Saunders voted to keep interest rates unchanged at a record-low 0.25 percent last month, at his first Monetary Policy Committee meeting since joining the BoE from U.S. bank Citi, where he worked as its chief UK economist.
Britain’s economy will likely “not be too bad” in the year ahead, barring a sharp rise in global or Brexit-related uncertainty, Saunders said in a text of a speech he is due to give on Wednesday to the Institute of Directors in Manchester.
His comments in his maiden speech chimed with those of fellow policymakers Kristin Forbes and Minouche Shafik last month. They also cited signs the economy has fared better than feared after June’s Brexit vote, dampening expectations of a further rate cut this year.
After its policy meeting in early September, the BoE said most officials expected to cut rates again this year if growth looked on track to slow broadly as forecast in August.
Saunders said he thought economic growth was probably running at a faster pace than the BoE had projected, but added there was probably more slack in the labour market as well, with pay growth likely to disappoint.
“My policy vote will probably depend on which of these factors is dominating,” he said.
Earlier on Tuesday, the International Monetary Fund lifted its forecast for British economic growth in 2016 to 1.8 percent from 1.7 percent, as retail spending has held up better than expected.
But it lowered its 2017 forecast by 0.2 percentage points to 1.1 percent on anticipation that uncertainty over separation from Europe will take a bigger toll on investment.
Saunders emphasised that the BoE had plenty of room for manoeuvre if the economy fares worse - or better - than it expects in future, using models to show how policy could respond to these scenarios.
If the economy turns out as the MPC expected in August, the model’s optimal path shown for interest rates would be to cut them to the zero lower bound in the near-term and then start to hike them around two years later - something which would be earlier than markets expect.
Saunders stressed that this was not necessarily the path the MPC would choose.
If the economy were to surprise on the upside by 2 percentage points over the next four quarters, the model indicates that the optimal strategy would be to begin hiking interest rates in 2017, he said.
But a sizeable downturn could result in interest rates holding at the zero bound, possibly until 2020.
The BoE had “substantial scope” for further stimulus through asset purchases if required, Saunders said. (Editing by Janet Lawrence)