Interview: BoE must be ‘alert’ over low rates

Posted on September 20, 2016

Michael Saunders, external member of the Bank of England's Monetary Policy Committee©Charlie Bibby/FT Montage

Michael Saunders, external member of the Bank of England’s Monetary Policy Committee

The Bank of England must be “constantly on the alert” for signs that its rock-bottom interest rate policy is harming, rather than helping, the economy, Michael Saunders, an external member of the bank’s Monetary Policy Committee, has said.

In his first interview since starting at the BoE in August, Mr Saunders said the evidence so far justified the bank’s post-Brexit vote interest rate cut and renewed quantitative easing programme.

He rejected criticism that QE has distorted markets, increased inequalities and put pressure on companies to repair holes in their pension funds rather than invest for the future.


Michael Saunders

Graduated in 1986 with an econometrics degree from the London School of Economics


1986-88 Institute for Fiscal Studies

1988-1990 Greenwell Montagu (now part of HSBC)

1990-98 Salomon Brothers

1998-2016 Citigroup (acquired Salomon Brothers)

“If we thought the adverse side effects of monetary policy easing outweighed the potential boost, then our willingness to use the tool of easing, even in a time the economy was sluggish, would be much less,” he said.

“I do not think we are at that tipping point, but that is something we have to be constantly on the alert for.”

Mr Saunders, who said he wanted to take an activist position on monetary policy, made it clear he was comfortable with the BoE’s monetary policy stance even though he took a different view of the effects of Brexit than most on the committee.

Retracting many of his Brexit predictions from his former role as a City economist, Mr Saunders said the negative effects were likely to be longer term and similar in scale to the estimates produced by the International Monetary Fund and the Organisation for Economic Cooperation and Development rather than as immediate and sharp as he had forecast when working for Citi.

But while the OECD described long-term losses of about 6 per cent of national income as “a major negative shock” and the IMF warned Brexit could cause “severe” damage, Mr Saunders preferred to describe the fallout as “modest” in the medium term.

“My views on how the effects of Brexit play out on UK growth have changed compared to what I might have thought eight months ago . . . The UK should be able to grow at a reasonable pace . . . over the next 10-15 years,” he said.

In the short term, the effect on the economy depends on how households and businesses respond to the heightened uncertainty. Mr Saunders is more optimistic than the latest official Bank forecasts for growth this year and next. He believes loose financial conditions will support household and business spending, the depreciation of sterling will boost export demand and the UK’s supply side flexibility will help the economy to weather the short-term uncertainty.

My views on how the effects of Brexit play out on UK growth have changed compared to what I might have thought eight months ago

But this more positive outlook does not mean Mr Saunders will necessarily be more hawkish than other members of the MPC. Though he expects growth to be stronger in the short term, he also thinks there is more scope for the economy to grow before inflation picks up — in other words, less need for monetary policy to be tightened quickly.

The Bank’s usual rule of thumb has been that there will be upward pressure on inflation if unemployment drops below 5 per cent. But Mr Saunders thinks the UK can now maintain a lower unemployment rate — perhaps at around 4 per cent.

He maintains a studiously neutral stance on the likely next move for monetary policy in the UK. But he is clear about what signs he will be looking for. Rising wages will point to a need for tighter monetary policy, while signs of further slack in the labour market — unemployment rising by “half a per cent or so” — would suggest monetary policy should be loosened further.

For the three years of his appointment he said he wanted to be guided by the data and, if the economy performed worse than he expected, the bank still had some levers it could pull despite interest rates being at a record low of 0.25 per cent, with historic lows also seen in market rates.

After August’s rate cuts, he said the moves in financial market suggested monetary policy still had traction to boost growth. “It is stating the obvious that the bank has less ammunition that it did when [the official interest rate] was substantially higher, but I do not think that we are that close to running out of ammunition at the moment,” he said.

“There is substantial scope to expand asset purchases [QE] if needed, and . . . what you saw [at the August meeting] was that monetary policy including asset purchases did seem to have a substantial effect on asset prices.”

Responding to concerns that the BoE’s actions were creating a crisis in corporate pension funds, Mr Saunders said that the central bank’s actions had raised the asset values of pension funds at the same time as increasing their liabilities.

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“That is probably better, even purely for pension fund deficits, than a policy of doing nothing, which would have left you with worse growth prospects, weaker asset prices and you might still have had some downward effect on bond yields . . . as a symptom of a depressed economy.”

He added that the best evidence that companies were not suffering from the BoE’s actions came from the similarity between the stock market performance of companies with big pension deficits and those without a pension problem in recent months.

In contrast to his willingness to consider further monetary easing now, Mr Saunders had previously predicted that the Bank was likely to raise interest rates in the wake of a Brexit vote to counteract a sharp rise in inflation above 3 per cent.

His change of stance, he said, stemmed from the pound not weakening as much as he had forecast. Sterling has lost about 11 per cent of its value in trade-weighted terms, rather than the 15-20 per cent fall Mr Saunders and his colleagues had expected earlier this year.

Speaking in his office in the third floor of the central bank, Mr Saunders said he was most surprised in his first six weeks at the BoE by the high quality of the internal research and the lack of air conditioning.

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