BoE’s Saunders says Ukraine impact on rate decisions unclear

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© Reuters. FILE PHOTO: The Bank of England and Royal Exchange are reflected in a puddle as a pedestrian walks past, amid the coronavirus disease (COVID-19) outbreak in London, Britain, November 19, 2020. REUTERS/Simon Dawson
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By William Schomberg

LONDON (Reuters) -Bank of England policymaker Michael Saunders, who backed a bigger interest rate rise last month than the majority of his colleagues, said he would not necessarily vote the same way in future although he did see inflation risks ahead.

Saunders said risks were on the side of “stronger and more persistent inflation pressures” than implied by the BoE’s forecasts last month.

“As a result, at the February meeting, I favoured a 50 basis-point rate hike, in order to move more rapidly to a more neutral monetary policy stance,” he said in the speech to the University of East Anglia on Tuesday.

“My preference for a 50bp hike at the February meeting does not necessarily imply that I will vote for 50bp steps in the event that rates have to rise further.”

Saunders and three other members of the Monetary Policy wanted to take Bank Rate to 0.75% to stop the recent jump in inflation – which hit a 30-year high of 5.5% in January – from becoming a longer-term problem.

But a five-strong majority on the MPC supported a smaller 25 basis-point hike to 0.50%.

Investors, responding to increased tensions after Russia’s invasion of Ukraine, on Tuesday scaled back their bets for another 25 basis-point increase in Bank Rate on March 17, after the MPC’s next scheduled meeting.

But they were still pricing in a roughly 90% chance of an increase of that magnitude.

Saunders said energy prices accounted for quite a lot of the recent inflation overshoot but there was “significant excess demand” in the economy and “inflation expectations are not as well anchored as I would like”.

He said his support for a 50 basis-point rate hike last month did not imply Bank Rate would have to rise higher than the peak of just under 1.5% in the yield curve that underpinned the BoE’s forecasts, which was based on market prices before the February meeting.

“All else equal, prompt tightening now could, in my view, help limit the total scale of tightening that will be needed to return inflation to target,” he said.