Second MPC member hints BoE needs to tighten UK monetary policy

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The chances of the Bank of England tightening monetary policy have increased as a second member of its rate-setting committee signalled he could vote to pare back its bond-buying programme as soon as next month.

Michael Saunders, an external member of the Monetary Policy Committee, who had been known as a dove, said action to curb inflation should be taken before the effects of removing the UK’s furlough scheme in September were evident.

His comments followed soon after Sir Dave Ramsden, a BoE deputy governor, indicated he was also changing his mind about inflation after official figures on Wednesday showed that prices rose 2.5 per cent in the year to June.

Saunders said the trends seen in the economy since May required a different stance. If they continued, “it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2 per cent target on a sustained basis”.

“Options might include curtailing the current asset purchase programme — ending it in the next month or two and before the full £150bn has been purchased — and/or further monetary policy action next year,” he added in an online webinar.

Michael Saunders said a modestly tighter policy stance would be ‘more akin to easing off the accelerator rather than applying the brakes’ © Financial Times

Saunders suggested he was prepared to change his vote at the August 5 meeting. His view will be regarded as significant because he has been known to favour extremely loose policy during the pandemic.

Saunders and Ramsden’s views contrast with BoE governor Andrew Bailey’s insistence before the latest inflation figures that the bank was not “whistling in the wind” while inflation rose out of control and it was right to do nothing to curb price rises.

In his speech, Saunders highlighted why he disagreed with the governor’s stance of early July. He forecast that inflation was likely to rise close to 4 per cent by the end of the year before moderating, but that the rise increased the risks that higher inflation would become persistent.

“A modestly tighter [monetary policy] stance . . . would help ensure that inflation risks two to three years ahead are balanced around the 2 per cent target, rather than tilted to the upside (which I suspect is the case with the current policy stance),” Saunders said.

This would ensure a smooth change in policy and be “more akin to easing off the accelerator rather than applying the brakes”, he added, saying that he thought the conditions the MPC had set for tightening policy had now been met.

Saunders added that there was no point in waiting until the full effects of ending the furlough scheme were known because that would mean waiting until at least February before taking action and would “would exacerbate risks that inflation expectations drift higher in coming months”.

“For me, the question of whether to curtail our current asset purchase programme early will be under consideration at our forthcoming meetings,” Saunders said, although he cautioned that this was not an announcement of his voting intentions.

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