A member of the Bank of England’s rate-setting Monetary Policy Committee has said the apparent slowdown in the UK economy is likely to be a blip, suggesting that he will vote again for interest rates to rise again next month.
Michael Saunders, an external member of the MPC, was one of two members of the nine person committee to vote, unexpectedly, in March for an immediate hike in the cost of borrowing from 0.5 per cent to 0.75 per cent in order to curb growing inflationary pressures.
Financial markets earlier this week had bet heavily on the entire MPC swinging behind an increase at its May meeting.
But official data on the economy this week, including retail sales, has come in weaker than expected, prompting the Bank’s Governor, Mark Carney, to suggest on Thursday evening that a May rate rise is not a certainty, sending the pound down sharply.
Yet Mr Saunders, speaking in Glasgow on Friday, seemed unconcerned about the recent soft data.
“The significance of this apparent slowdown is....questionable,” he said.
“Economic activity in March, and especially retail sales, was hit by unusually heavy snow. Previous experience suggests that such snow effects typically reverse in the next month or two.”
The ONS will publish its preliminary estimate for GDP growth in the first quarter of 2018 next week, with some analysts suggesting it could be as low as 0.2 per cent, half the growth rate registered at the end of 2017.
But Mr Saunders noted that the ONS has a history of releasing weak Q1 GDP estimates that are subsequently revised up sharply as new data comes in and methodological revisions are implemented.
“I suspect that economic growth in the coming year or two will remain around its recent pace of 1.5 per cent-2 per cent, i.e. marginally above potential,” he said.
Mr Saunders, previously an economist at the investment bank Citigroup, also sought to add some clarification to the MPC’s longstanding guidance that future UK rate rises is likely to be “limited and gradual”.
“’Gradual’ does not imply that the MPC can only raise rates at a very low frequency, such as once per year. Nor does ‘gradual’ mean that the MPC cannot tighten faster than markets price in,” he said.
Mr Saunders concluded by stating that his own vote in May will depend on the data and analysis, but the content of his speech suggests he is likely to vote again to raise rates.
The question is how many of Mr Saunders MPC colleagues share his bullishness about the UK’s near-term prospects and his willingness to look through the recent weak data.
Some analysts have suggested that the MPC may now hold fire in May and hike again at a meeting later in the year instead.