LONDON (Reuters) – Britain’s economy is likely to hold up despite uncertainty about Brexit and the Bank of England might need to get a bit more activist by raising interest rates, one of the two BoE policymakers who voted last week for a rate hike said.
Striking a more upbeat tone about the economy than the latest message from the BoE as a whole, Michael Saunders told the Evening Standard newspaper that a recent fall in the unemployment rate to its lowest since the 1970s means wages and inflation might be about to rise more strongly.
The test will come going forward, he said in an interview published on Friday.
The amount of spare capacity is much less now than in the past few years. So it follows from that it would be normal for the response of policy, if growth surprises on the upside, to be a bit more activist than it has been in the past few years.
The BoE cut interest rates to 0.50 percent in 2009 and then cut them again to 0.25 percent in August last year, shortly after the referendum decision to take Britain out of the European Union.
After initially withstanding the Brexit vote shock, the British economy has slowed this year as consumers felt the pinch of higher inflation and weak wage growth.
The BoE’s eight sitting rate setters voted last week by 6-2 to keep rates on hold, with Saunders and Ian McCafferty in the minority.
Saunders told the Evening Standard that Britain’s departure from the EU meant the economy would probably grow more slowly in the coming years than it otherwise would have done, but the impact would be spread over a long period.
Maybe it might grow five percentage points less over the next 15 years. That’s a fairly sizeable economic loss if that’s the case. But that’s over a long period of time, he said.
Saunders he thought Britain’s economy was currently growing at an annual pace of about 2 percent , based on private sector surveys which have been stronger than official readings of output.
Last week, the BoE lowered its forecast for growth this year to 1.7 percent.
What it would take to persuade me (to no longer vote for a rate hike) were signs across a range of business surveys that the economy is slowing sharply, Saunders said.
My guess, my hunch, is that growth will be OK and the jobless rate will continue to fall, and that’s what motivated my view on rates.
Reporting by William Schomberg; Editing by David Milliken and Catherine Evans
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