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BoE's Saunders says Bank Rate could top 2% in next year

·1-min read
FILE PHOTO: A general view shows the Bank of England and the Royal Exchange Building in London

LONDON (Reuters) -Bank of England policymaker Michael Saunders, who has backed a bigger interest rate rise than most of his colleagues, said Bank Rate could reach 2% or higher during the next year in order to curb inflation expectations after the recent surge in prices.

The BoE has raised rates five times since December as it tries to stop the surge in inflation from becoming embedded in Britain's economy, and it is expected to increase them again at its August policy meeting - which will be Saunders's last.

He warned that price pressures could be harder to stop than the BoE's central forecast projects thanks to Britain's declining rate of potential growth - meaning the economy can no longer grow as quickly before generating excess inflation.

Financial market forecasts that Bank Rate - currently at 1.25% - would reach or surpass 2% during the next year were not "implausible or unlikely", he added.

"But, rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may (in my view) still have some way to go," he said in a speech at the Resolution Foundation think tank on Monday.

Saunders warned that the cost of tightening too slowly was probably higher than the cost of raising rates too much.

"With excess demand and elevated inflation, 'too little, too late' would increase the likelihood that recent trends in underlying pay growth, longer-term inflation expectations and firms' pricing strategies become more firmly embedded," he said.

(Reporting by Andy Bruce and William Schomberg; editing by David Milliken)

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