BOE’s Saunders warns of 1st UK rate hike in a decade

Bloomberg

Ten years since the Bank of England (BOE) last raised interest rates, policy makers are warning Britons to prepare for the next one.
“Our foot is pretty much on the floor with the accelerator,” Michael Saunders, a member of the rate-setting Monetary Policy Committee, told The Guardian in an interview published late on Tuesday. “Households should prepare for interest rates to go higher at some point.”
The comments came on the same day that the central bank told lenders to prove they’re not underestimating the risks of rapidly growing consumer credit given the current “benign economic environment.” With BOE interest rates at a record low, shoppers have borrowed and run down the rate at which they save to fuel spending and prop up the economy since the Brexit vote, with many first-time borrowers never having experienced an increase in official borrowing costs.
Governor Mark Carney said last week that “some removal of monetary stimulus is likely to become necessary,” tweaking his previous remark that it’s not yet time to start making that adjustment.
“I don’t think the economy needs as much stimulus” as it currently has, said Saunders, who voted for tighter policy in June. “But if rates do go up, it will be in the context of the economy doing OK and unemployment being low and probably falling.”

August Meeting
Members of the MPC are weighing up the risks of faster inflation against the need to support growth ahead of their next announcement on Aug. 3. They have publicly split in recent weeks, with three of eight officials in June dissenting for tighter policy and a fourth subsequently suggesting he might follow suit.
One risk of raising rates too soon is that highly indebted households curtail their spending, putting the brakes on an expansion not getting enough of a boost from exports.
However, officials have also warned about the potential threats posed by leaving policy too loose for too long, which include losing control of inflation expectations and fueling consumer credit.
“To me this is the time when you don’t take the punch bowl away fully but you just start to edge it away,” Saunders said. “The risk that you run with maximum stimulus is that the jobless rate keeps falling then at some point if pay growth picks up you have to reverse course very sharply. It would then be much harder for tightening to be limited and gradual.”
The BOE, which kept its benchmark interest rate at 0.25 percent in June, last increased borrowing costs 10 years ago on Wednesday — to 5.75 percent. Policy makers subsequently cut rates in response to the financial crisis, recession and the threat of deflation.
Fragile Recovery
A report showing services growth slowed in June indicated that the U.K. recovery may still be uneven as the government starts talks to leave the European Union. IHS Markit said that while GDP growth probably improved to 0.4 percent in the second quarter, it is likely to cool again in the three months through September.
The BOE isn’t alone in contemplating lifting policy from emergency levels. The U.S. Federal Reserve starting increasing rates in December 2015. Investors see Canada raising rates next week for the first time since 2010, and European Central Bank officials have started talking about how to signal winding down stimulus.
In the U.K., Saunders and Ian McCafferty have called for tighter policy, while Chief Economist Andy Haldane has said he’s considering it. On the other side of the debate, BOE official Jon Cunliffe said last week that officials have time to see how domestic inflation pressures evolve before they need to act, while his colleague Ben Broadbent has not made his stance public since voting to keep policy unchanged at last month’s meeting.
The balance for the August decision is difficult to predict, not least because the rate-setting panel may have two new voters without a track record. Kristin Forbes, the leading advocate of higher rates, is being replaced by economics professor Silvana Tenreyro. A successor for former deputy governor Charlotte Hogg is also due to be appointed to the nine-member MPC.