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Why MPC member Saunders voted to raise interest rates

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  • 31/08/2017
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Why MPC member Saunders voted to raise interest rates
MPC member Michael Saunders voted to raise Bank Rate by 25 basis points at the latest Monetary Policy Committee meetings in June and August 2017 because inflation is well above target and spare economic capacity has been absorbed faster than expected.

He explained to business leaders in Cardiff: “The prospective trade off is beyond my limits of tolerance, with the likelihood of an early elimination of slack and an extended period of above-target inflation.”

Saunders continued: “We do not need to be putting the brakes on so much that the economy weakens sharply. But, our foot no longer needs to be quite so firmly on the accelerator in my view. A modest rise in rates would help ensure a sustainable return of inflation to target over time.”

He also mentioned that given a scenario where the Brexit process undermines business and consumer confidence, an “overly loose stance as insurance against this scenario” should not be maintained, but rather a willingness to respond as needed if it happens.

Andrew Goodwin, lead economist at Oxford Economics, noted that Saunders’ speech painted a more upbeat picture of the economy than the recent Inflation Report, and advocated the benefits of the MPC taking its foot off of the monetary accelerator.

“The key difference between Saunders and the majority is his willingness to act without hard evidence that underlying inflationary pressures are building. And given that this evidence seems unlikely to materialise for some time, we expect him to remain firmly in the minority,” said Goodwin.

Saunders, who has been an MPC member since August last year, has often been in favour of high interest rates.

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