BoE’s Saunders says markets right to price in quicker tightening


Michael Saunders, a member of the central bank’s Monetary Policy Committee, was quoted as telling The Telegraph he was concerned that capacity pressures and higher pay growth were driving an inflation pickup that “could become more persistent unless monetary policy responds”.

LONDON: A Bank of England (BoE) policy maker says markets are right to price in an earlier interest-rate hike than previously expected as inflation accelerates.

Michael Saunders, a member of the central bank’s Monetary Policy Committee, was quoted as telling The Telegraph he was concerned that capacity pressures and higher pay growth were driving an inflation pickup that “could become more persistent unless monetary policy responds”.

“I think it is appropriate that the markets have moved to pricing a significantly earlier path of tightening than they did previously,” said Saunders, one of two policy makers who voted last month to end the BoE’s bond buying programme immediately.

Saunders has emerged as one of the more hawkish BoE officials in the past few months and his comments will vindicate investors who are betting on an imminent rate hike, though he said he was wary of telegraphing the bank’s intentions “too precisely”.

BoE governor Andrew Bailey warned earlier of a potentially “very damaging” period of inflation for British consumers, comments that were likely to boost bets that he favoured an imminent increase in interest rates.

In an interview with the Yorkshire Post, Bailey said he was concerned that prices had accelerated beyond the BoE’s 2% target, and warned that it would likely even exceed the central bank’s latest forecast.

“We have got to, in a sense, prevent the thing becoming permanently embedded because that would obviously be very damaging,” he said. The BoE said last month inflation would probably exceed 4% in the last quarter of this year.

Investors have loaded up on bets on faster BoE rate hikes in recent weeks. Markets are almost-fully pricing in the first move by the end of this year and see the rate, now at 0.1%, hitting 0.75% in 2022.

In its last meeting, the policy committee raised the possibility that it could act as early as November if deemed necessary.

Crucially, the governor also said he didn’t anticipate a further increase in unemployment, the Yorkshire Post reported, even after the government ended its furlough programme last month.

Economists widely expect the BoE to weigh jobs data following the end of the programme before deciding whether to raise borrowing costs.

A flurry of news last week undercut the BoE’s original view that much of the jump in prices would prove transitory, and came amid growing bets that spiking inflation would force the BoE to hike interest rates in the near future.

“This has been an almost unprecedented set of events,” Bailey said. “They are not over yet, that we are learning. We have to manage our way through them, and we will do that.”

Bailey’s comments come after the BoE’s new chief economist Huw Pill said this week that the current spike in inflation in the UK will last longer than originally thought.

In a separate report, the news agency said that many central banks were starting to withdraw the emergency stimulus they had introduced to fend off last year’s pandemic recession. With inflation accelerating, the Federal Reserve is set to slow its asset-purchase programme, while peers in Norway, Brazil, Mexico, South Korea and New Zealand are among those to have already raised interest rates.

Behind the shift are signs that the recent inflation scare won’t fade soon amid supply chain strains, surging commodity prices and labour shortages. ― Bloomberg

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