Fears of a slowdown triggered by heavy snowfall have been overblown, according to a Bank of England policymaker, who has said the UK economy could withstand interest rates reaching as high as 2% within the next few years.
Michael Saunders, a member of the monetary policy committee (MPC), said the Bank should move to raise interest rates from the current level of 0.5%.
Suggesting the economy no longer needed as much support as immediately after the financial crisis, he said “gradual” rate increases by Threadneedle Street over the coming years “need not mean glacial” steps were taken.
His comments come after Mark Carney suggested the Bank could delay raising interest rates next month, contrary to economists’ expectations. Although the Bank of England governor said there would be more rate increases over the next few years, some of the recent economic data had been weaker and inflation had fallen faster than the Bank had expected.
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Carney used an interview with the BBC late on Thursday to say he was “conscious that there are other meetings over the course of this year”, which was interpreted by economists as downplaying the chances of a rate hike at the next MPC meeting on 10 May. Sterling slipped against the dollar on Friday morning after Carney’s comments but failed to recover after Saunders’ speech, trading down 0.5% at $1.4018 by the afternoon.
Recent readings of the economy have shown a widespread slowdown as a consequence of the freezing weather from the “beast from the east”, which brought construction work to a standstill and forced shoppers to stay at home. The National Institute for Economic and Social Research estimates the growth rate to have fallen by half in the first quarter of 2018.
However, Saunders questioned the significance of the apparent slowdown caused by the snow. Speaking in Glasgow on Friday, he said: “Previous experience suggests that such snow effects typically reverse in the next month or two.”
Economic growth over the course of the year could be as high as 2%, while inflation from rising wages could also be stronger than expected, he said. That would place the British economy ahead of forecasts issued by the International Monetary Fund this week for a growth rate of 1.6%.
Saunders was one of two economists on the nine-member MPC who voted to raise interest rates in March, having been one of the most prominent supporters of higher borrowing costs since he joined the panel in August 2016. After almost a decade of interest rates stuck close to zero, providing support to the economy, he said the Bank “no longer needs to be so firmly on the accelerator”.
The Bank raised interest rates for the first time in a decade in November 2017, taking the headline borrowing rate to 0.5% from 0.25%. However, Saunders said that the neutral level for interest rates – at which the Bank would neither be encouraging growth or acting as a drag on the economy – would be about 2%, well below the level before the 2008 financial crisis.
Official figures published on Wednesday showed that inflation had fallen unexpectedly to 2.5% in March from 2.7% in February. Having hit the lowest level in a year, some economists questioned whether the Bank would need to raise interest rates as a tool used to curb inflationary pressures.
However, economists at NatWest Markets said there was still a 75% probability of the Bank raising interest rates next month, adding: “Whilst the probability of a Bank rate rise in May has inevitably diminished, in our view a 25 basis point hike remains by some margin the most likely outcome.”