Michael Saunders, a member of the Bank of England's Monetary Policy Committee, has outlined the reasons for his recent hawkish tendencies on raising interest rates.
He voted to lift bank rate by 25 basis points at both the June and August MPC meetings having earlier voted for no change. On a regional visit to Wales he made a speech this morning at Cardiff's Park Plaza Hotel, entitled 'Monetary policy as the output gap closes'.
A short version of his reasoning appears in the summary section of the speech manuscript, which we have seen.
Trade-off terms in marked shift
Since the EU referendum, the MPC has sought an appropriate trade-off between above-target inflation and below-potential output, he notes. The terms of that trade-off have shifted markedly in recent quarters.
- Inflation has risen well above target
- Spare capacity in the economy has been absorbed faster than expected
- The jobless rate is now slightly below the estimate of equilibrium
“The prospective trade-off is beyond my limits of tolerance, with the likelihood of an early elimination of slack and an extended period of above-target inflation,” he says. “We do not need to be putting the brakes on so much that the economy weakens sharply.”
Michael Saunders, courtesy of the Bank of England
Take the foot off the accelerator
But the MPC's foot no longer needs to be quite so firmly on the accelerator, he believes. “A modest rise in rates would help ensure a sustainable return of inflation to target over time.
“My view is that we currently have limited slack and are likely to see greater tightening in the labour market than the August IR (inflation report) base case.
“As a result, I believe we probably face a somewhat more protracted inflation overshoot, and hence I judge that an earlier rise in rates is appropriate.”