Interest rates could top 2% next year, says Bank of England policymaker | Economic news
A Bank of England policymaker has said interest rates could hit 2% or more next year to fight inflation.
Michael Saunders, a member of the Bank’s Monetary Policy Committee (MPC), said he did not think such financial market forecasts were “implausible or improbable”.
“Rather than focusing on an accurate forecast for The bank rate over the next year, the key point is that the tightening cycle can, in my view, still have some way to go,” he said in a speech to the Resolution Foundation think tank.
Interest rates are now 1.25% – compared to 0.1% in December.
They are expected to rise again at the Bank’s next policy meeting in August – the last before Mr Saunders leaves.
The economist warned that while there are signs of an economic slowdown, the risks of not raising rates sharply and quickly outweigh those of being too cautious.
He backed increases of 0.5 percentage points twice, unlike most of his colleagues, who favored increases of 0.25 percentage points.
He voted to raise rates to 1.5% at the MPC meeting in June.
“The MPC must balance the risks and costs of ‘too much, too soon’ tightening against ‘too little, too late,'” he said.
“In my opinion, the cost of the second result – not tightening up fast enough – would be relatively high at the moment.
“Conversely, if the Committee tightens ‘too much, too soon’ and then finds that the economy and inflationary pressures are much weaker than expected, the policy outlook could adjust (if necessary) and inflation expectations would likely better anchored than today.”
Mr Saunders said he believed the UK economy could withstand aggressive rate hikes.
“There are signs that economic activity is slowing as rising inflation erodes real incomes and spending,” he said.
“But this slowdown must be measured against the backdrop of the economy at the start of this year being in excess demand, potential growth is low, recruitment challenges are high and there is a significant backlog of labor demand. not satisfied.”
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He hit back at a suggestion by Conservative leadership candidate Liz Truss that the government should set out a “clear direction” for monetary policy.
The Bank of England is currently independent from the government and makes its own decisions.
“There’s always a debate about whether interest rates go up or down,” Saunders said.
“But I think the fundamentals of the UK monetary policy framework are really important and best left intact.”