The Bank of England (BOE) doesn’t have to wait until all political uncertainty around Brexit is resolved to raise interest rates, according to policy maker Michael Saunders. The economy will probably move to “significant excess demand” over the next two to three years if Brexit goes smoothly, Saunders said, and will need monetary tightening as a result. Consumer spending will also likely be stronger than the BOE’s last forecasts indicate, he said.
Saunders, who is known as one of the more hawkish members of the central bank’s nine-member Monetary Policy Committee, has led calls for higher rates in the past. His comments are a warning that policy makers may look past unexpectedly weak economic growth so far in the second quarter. Markets aren’t pricing in a hike until well into next year.
“The MPC does not necessarily have to keep rates on hold until all Brexit uncertainties are resolved,” Saunders said in a speech in Southampton, UK. “The MPC has already raised rates twice since the Brexit vote. We will act again if needed to ensure a sustained return of inflation to target over time.” There would be a cost in waiting too late to increase interest rates though, Saunders said, “until all the potential warning signs across pay, capacity and prices are flashing red.”