April 20, 2018 / 9:36 AM / a year ago

Bank of England rate rises shouldn't be 'glacial': Saunders

GLASGOW, Scotland (Reuters) - The Bank of England should avoid taking a “glacial” approach to interest rate rises, one of the central bank’s more hawkish policymakers said on Friday, after markets pushed back expectations for the date of its next rate rise.

FILE PHOTO: Workers emerge from Bank underground station with the Bank of England (L) and Royal Exchange building (R) seen in the City of London financial district, London, Britain, January 25, 2018. REUTERS/Toby Melville/File Photo

Michael Saunders - one of two officials to vote to raise interest rates last month - said growing domestic inflation pressures and a solid growth outlook meant “our foot no longer needs to be so firmly on the accelerator”.

But Governor Mark Carney roiled markets on Thursday and Friday, after he described recent data as “mixed” and said there were likely to be differences of view among the MPC next month, who were “conscious that there are other meetings over the course of this year.”

Sterling fell to a three-week low against the dollar after his comments, and on Friday interest rate swaps priced in a less than 50 percent chance of a rate rise in May, which would be only the second from the BoE since the financial crisis.

Saunders told reporters after speaking at the University of Strathclyde that he did not want to finely steer market bets on a rate rise and was unsure that differences among the MPC were any wider than usual.

“I would give a ‘no comment’ on whether or not market probabilities of this meeting or that meeting are too high or too low,” he said. “As for the next one ... ‘wait and see’, I thought that’s what Mark (Carney) was saying.”

Saunders said he believed inflation pressure from the labor market was likely to be stronger than the BoE had forecast in February and that the economy would grow by 1.5-2.0 percent a year over the next couple of years, just above its potential.


He reiterated the MPC’s guidance to markets that “any further tightening is likely to be at a gradual pace and to a limited extent” but added that “a key point is that ‘gradual’ need not mean ‘glacial’.”

“‘Gradual’ does not imply that the MPC can only raise rates at a very low frequency, such as once per year. Nor does ‘gradual’ mean that the MPC cannot tighten faster than markets price in,” he said.

Previous tightening cycles had on average seen rates rise by a full percentage point over eight months, so “quite a wide range of paths ... would qualify as gradual relative to that experience”, Saunders said.

Last month fellow MPC member Gertjan Vlieghe said the BoE might need to raise rates once or twice a year over the next few years.

British interest rates - currently 0.5 percent - needed to steadily return to a more normal or “neutral” level, which Saunders said was estimated at around 2 percent but subject to change.

Economists needed to keep a close eye on whether lower unemployment led to a sustained pick-up in wage growth as expected - and uncertainty about this was one reason the MPC should not raise rates too fast.

However, signs of a soft first-quarter economic performance were of “questionable” importance, given the role of bad weather and upward revisions to first-quarter growth in past years.

Wage growth figures this week were in line with his expectations, weaker retail sales largely reflected snow in March and a fall in inflation reflected declining pressure from past sterling weakness, Saunders said.

Even before Carney’s comments, markets had become slightly more doubtful about rate rises this year - especially after May - due to the failure of wages to grow as fast as most economists had expected, as well as the drop in inflation to its lowest in more than a year.

Writing by David Milliken, editing by Andy Bruce and Jon Boyle

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