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Continued ‘sluggish’ economy amid reasons for base rate cut – MPC’s Saunders

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  • 15/01/2020
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Continued ‘sluggish’ economy amid reasons for base rate cut – MPC’s Saunders
“Unusual” slow growth in the UK economy is one of the key reasons Michael Saunders, external member of the Bank of England’s (BoE) Monetary Policy Committee (MPC) has voted to lower interest rates twice in a row.

 

Saunders (pictured) and fellow MPC member Jonathan Haskel voted in favour of a 0.25 per cent cut at the November and December meetings, going against the committee’s other seven members’ decision to hold the rate at 0.75 per cent. 

In a speech given at South Eastern Regional College in Bangor, Northern Ireland today, Saunders explained his reasons for voting for a lower rate. 

He said the UK economy had remained “sluggish” amid soft global growth and Brexit uncertainty, and noted that it was “unusual for growth to slow so much when fiscal policy and monetary conditions are supportive”. 

In the last quarter of 2019, the year-on-year growth in GDP fell below one per cent for the first time since 2012, Saunders said, attributing this to political and global uncertainty. 

He also said the current bank base rate was negative in real terms, as it fell below the 2.25 per cent level the MPC estimated it would be in August 2018. 

 

Lower costs and cutback spending

Saunders also predicted businesses would rebuild margins by lowering costs and cutting back on corporate spending rather than increasing prices, thus causing inflation to fall below its two per cent target. 

He said because of this, he voted to reduce the base rate by 0.25 per cent to “underpin activity and reduce risks of a persistent inflation undershoot”.

However, he did not give any indication of how he would vote at the next meeting at the end of January saying the decision “will be made at the proper time”. 

Saunders said he would not consider it a “policy failure” if the BoE was to reduce the base rate and see the economy rebound. 

“It would be a benign outcome: monetary policy would have helped underpin the pickup and, given the economy currently has some slack, we would have time to tighten again before significant excess demand emerges,” he added.

 

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