Michael Saunders of the Bank of England’s Monetary Policy Committee has indicated that interest rates could exceed two per cent in the coming year as policymakers aim to temper inflation.
Delivering a speech to the Resolution Foundation, Saunders said that increasing interest rates was necessary despite the UK’s economic slowdown, and doing “too little, too late” outweighed the risks of intervening “too much, too soon”.
He said: “In broad terms, the MPC has to balance the risks and costs of tightening ‘too much, too soon’ versus ‘too little, too late’. In my view, the cost of the second outcome – not tightening promptly enough – would be relatively high at present.
“With excess demand and elevated inflation, ‘too little, too late’ would increase the likelihood that recent trends in underlying pay growth, longer-term inflation expectations and firms’ pricing strategies become more firmly embedded.”
Addressing forecasts by financial markets that interest rates could rise above two per cent in the next year, Saunders said that he did not “regard such an outcome as implausible or unlikely.”
Saunders also highlighted that the economic slowdown seen at the start of the year needed to be “gauged against the backdrop that the economy…was in excess demand, potential growth is low, recruitment difficulties are elevated, and there is a sizeable backlog of unmet labour demand.”
He added: “Moreover, since the May monetary policy report forecast, the government has announced further fiscal support measures.”
With inflation continuing to rise and forecast to exceed 10 per cent in 2022, interest rates are expected to be raised again in August when the committee reconvenes.
Saunders was one of three members of the Monetary Policy Committee who voted for interest rates to be hiked to 1.5 per cent in June, and he said that he would be voting for a 0.5 per cent rates increase in August.
In June, the majority of the committee instead voted for rates to be increased from one per cent to 1.25 per cent. It remains to be seen what the August meeting will bring.
Meanwhile, inflation in the year to June 2022 stands at 9.4 per cent according to the latest figures from the Office for National Statistics.
Photo by Robert Bye on Unsplash
