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Households should prepare for higher interest rates, warns MPC member

  • 05/07/2017
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Households should prepare for higher interest rates, warns MPC member
Households are being told to prepare for a rise in interest rates and not to see Brexit negotiations as a shield against changes to monetary policy, warned a member of the Monetary Policy Committee (MPC).

In an interview with the Guardian, Michael Saunders explained why he thinks rates will rise, and why he voted for an increase to 0.5% in the last MPC meeting.

He said: “I think households should prepare for interest rates to go higher at some point. But if rates do go up, it will be in the context of the economy doing [okay] and unemployment being low and probably falling,” he said.

The current Bank rate stands at an all-time-low of 0.25%. In last month’s MPC meeting the committee voted 5 to 3 in favour of keeping the rate at its present level.

Bank of England Governor Mark Carney said the MPC’s decision to hold had been made because it was not clear how long the slowdown in growth would last.

Growth slowed from 0.7% in Q4 last year, to 0.3% in Q1. Carney said it was his view that given the mixed signals on consumer spending and business investment, during the last meeting, it was too early to judge with confidence how large and persistent the slowdown in growth would prove.

He added that as domestic inflationary pressures, particularly wages and unit labour costs, were still subdued, it was appropriate to leave the policy stance unchanged at that time.

However, Saunders told the Guardian he did not think the economy needed the amount of help it was presently receiving.

“At the moment, in monetary policy terms if you like, our foot is pretty much on the floor with the accelerator,” he said. “Record low policy rate, large stock of quantitative easing, and I don’t think the economy needs as much stimulus as that.”

He added that the MPC was not held back from making decisions while the government attempted to secure the right terms for the UK’s exit from the EU.

“We are not constrained from adjusting interest rates during the Brexit period. There’s no sense that policy has to stay on hold just because Brexit negotiations are under way,” he said.

Last week, Carney’s comments about monetary stimulus caused the currency markets to speculate he had changed his mind on holding rates down.

He said: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”

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