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Bumpy Brexit risk does not justify record low rates: BoE's Saunders
August 31, 2017 / 7:39 AM / 22 days ago

Bumpy Brexit risk does not justify record low rates: BoE's Saunders

The Bank of England is seen in the City of London, Britain, August 23, 2017. REUTERS/Hannah McKay

CARDIFF (Reuters) - The Bank of England should not keep interest rates at their record low as an insurance policy against the risk of a “bumpy Brexit” and it needs to start raising borrowing costs now, BoE policymaker Michael Saunders said.

Saunders, one of two BoE rate-setters who have voted recently for a rise in bank rate, said in speech on Thursday that the central bank risked being rushed into sharper rate hikes in future, potentially hurting growth, if it did not start to ease the economy off its near-zero rates now.

“We do not need to be putting the brakes on so much that the economy weakens sharply,” he told an audience in Cardiff. “But, our foot no longer needs to be quite so firmly on the accelerator in my view.”

Britain’s economy has shown one of the weakest growth rates in the Group of Seven nations so far this year as the fall in the value of the pound pinched the spending power of consumers.

But at the same time the Brexit hit to sterling has pushed up inflation above the BoE’s 2 percent target, leading to the split among the central bank’s rate-setters.

Earlier this month, they voted 6-2 to keep rates at 0.25 percent and the BoE warned that Brexit was weighing on the economy.

But Saunders, in his speech, said there should be no automatic implications for rates if Brexit does not go smoothly, something which could push down the value of the pound further.

That could add to inflation which Saunders said was already likely to hit roughly 3 percent soon.

He repeated Governor Mark Carney’s comments last year that the Bank was “not indifferent” to the level of the pound, but he said there was no particular level that worries the Bank.

INFLATIONARY PRESSURES

Saunders also said the economy was likely to “not be too bad” in the coming quarters, saying there had been a marked improvement in Britain’s export performance since the pound’s sharp fall last year.

There was little or no slack left in Britain’s economy and domestically generated inflation pressure - largely through higher wages - was likely to rise, Saunders said.

The pound has fallen further against a range of currencies over the last month, with the fall against the euro particularly acute. Saunders said this in part reflected perceptions of improved economic growth in other European economies.

While striking a more upbeat tone than the BoE’s central forecast, Saunders conceded there were risks to his view.

There was no sign at present that productivity - arguably Britain’s biggest economic challenge - was about to improve.

Other potential risks included a sharper decline in consumer spending and it was unclear how changes in inward migration might affect the economy, he said.

Official data last week showed net migration to Britain fell to a three-year low in the 12 months to March, as fewer EU immigrants arrived and growing numbers left.

Saunders noted that job vacancies in the three industry sectors that are most reliant on EU workers - accommodation and food services, administration and support, and manufacturing - had increased at 10 times the rate for all sectors.

Editing by William Schomberg; Editing by Jon Boyle

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