Bank of England rate rises should be gradual, not glacial - Saunders

By Elisabeth O'Leary

GLASGOW, Scotland, April 20 (Reuters) - The Bank of England should raise interest rates gradually, not glacially, and no longer needs to keep its foot firmly on the accelerator at a time of rising domestic inflation pressure, BoE (Shenzhen: 000725.SZ - news) policymaker Michael Saunders said on Friday.

Saunders voted for a rate rise in March and said signs since then of a soft first-quarter economic performance were of "questionable" importance, given the role of bad weather and a history of upward revisions to first-quarter growth in past years.

Earlier on Friday, financial markets heavily discounted the chance of a rate rise at next month's policy meeting, after BoE Governor Mark Carney told the BBC that recent data were mixed and indicated differences of view on the MPC.

Saunders said he believed inflation pressure from the labour market was likely to be stronger than the BoE had forecast in February and that the economy would grow by 1.5-2.0 percent a year over the next couple of years, just above its potential.

Saunders reiterated the BoE's joint position that "any further tightening is likely to be at a gradual pace and to a limited extent" but added that "a key point is that 'gradual' need not mean 'glacial'."

"'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 in a speech at the University of Strathcylde.

British interest rates needed to return to a more normal or neutral level, which he said was estimated as being around 2 percent, although there was uncertainty around this. (Writing by David Milliken, editing by Andy Bruce)