BOE's Saunders Sees No Rush to Hike Rates as Brexit Fog Persists

(Bloomberg) -- The Bank of England doesn't need to rush to raise interest rates until the uncertainty of Brexit lifts, according to policy maker Michael Saunders.

In a speech in London Wednesday, Saunders, considered one of the most hawkish members of the Monetary Policy Committee, said that tame inflation and a slowdown in growth meant officials could adopt a wait-and-see approach as Brexit plays out.

BOE officials voted unanimously last month to hold interest rates at 0.75 percent, but Saunders's comments may damp some speculation that he's a candidate to dissent against that view before the U.K.'s future is clearer.

Still, Saunders indicated he's not entirely in line with all his colleagues. He said that he was “genuinely unsure” on the path ahead for policy after a no-deal Brexit in contrast to his colleague Gertjan Vlieghe, who last month indicated he thought a rate cut would be more likely in such a scenario. Saunders said he was “more agnostic” about the correct response.

Should the U.K. avoid a chaotic exit, economic growth is likely to strengthen again, meaning limited and gradual interest-rate increases will be needed to keep inflation in check, he said. A “gradual” rate of tightening doesn't mean “fantastically slow,” he said in response to questions following the speech.

“The possibility that monetary tightening might be needed in the future does not necessarily mean we need to tighten now,” Saunders said. “Given that at present economic growth is probably not strong enough to create excess demand and inflation is reasonably well behaved, for now it makes sense to wait and to see how Brexit developments unfold.”

The U.K. is currently due to exit the European Union, with or without a deal, on March 29, but a delay to the process is looking more likely, potentially extending uncertainty. If it were to be delayed, the reaction of households and businesses would determine the BOE's response, Saunders said. It's possible growth may pick up during the extension period, he said.

The comments on policy came in a speech that mainly focused on the pass through of the BOE's interest rate increases to households and businesses. The link, he said, is less effective when policy rates are low, something that has been evidenced by the 50 basis point increase in the benchmark since 2017 being barely reflected in households mortgage and deposit rates.

That may mean officials need to adjust monetary policy “slightly more actively,” cutting or raising further than it would usually need to, he said.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net;Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint

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