'Gradual rate rise' need not mean 'glacial', says MPC's Saunders

Michael Saunders, external MPC member at the Bank of England, has detailed why any future rate rises will be at a "gradual pace and to a limited extent" but added that "'gradual' need not mean 'glacial'."

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Rozi Jones
20th April 2018
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""Gradual” does not imply that the MPC can only raise rates at a very low frequency, such as once per year. Nor does “gradual” mean that the MPC cannot tighten faster than markets price in."

In a speech at the University of Strathclyde in Glasgow, Saunders said: ""Gradual” does not imply that the MPC can only raise rates at a very low frequency, such as once per year. Nor does “gradual” mean that the MPC cannot tighten faster than markets price in."

He added that “gradual” does not necessarily mean that the exact timing of rate changes must be totally predictable or signalled in advance.

Explaining his decision to vote for a 25bp rate hike last month, Saunders said "the economy no longer needs as much stimulus as previously".

He said that with continued growth in the economy, spare capacity has fallen further and that the direct boost to CPI inflation from sterling’s depreciation – triggered by the Brexit vote – is starting to fade.

Saunders continued: "CPI inflation remains above our 2% target but, barring significant new swings in sterling or commodity prices, inflation probably peaked with the 3.1% figure late last year."

Discussing consequences of a further rate rise, Saunders noted that average fixed mortgage rates are "little changed from levels prevailing before the recent rate hike" and is still lower than a year ago.

The Credit Conditions survey indicates that mortgage spreads are being compressed by competitive pressures as lenders seek to gain market share, reflecting the expansion of new lenders and very low rates of mortgage arrears.

He did note the uncertainties surrounding Brexit, but said the provisional agreements between the UK and EU have "probably reduced some near-term Brexit-related uncertainties and downside risks to growth".

Saunders concluded: "The MPC’s forecast that any further tightening is likely to be gradual and limited would not prevent the Committee from responding promptly if needed – I stress, if needed – in the event of a rapid change in the economic outlook.

"But overall, I suspect that economic growth in the coming year or two will remain around its recent pace of 1.5%-2%, i.e. marginally above potential."

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