The Bank of England may need to act quickly to deal with rising inflation if price pressures persist, one of the Threadneedle Street policymakers said.
Michael Saunders, one of the eight members of the Bank’s monetary policy committee, said that on current trends it may become appropriate “quite soon” to curb some of the stimulus provided to support the economy from the start. of the pandemic.
In a sign of the Bank’s growing concern over rising inflation, Saunders became the second MPC member in less than 24 hours to say he was considering voting to tighten his policy.
Dave Ramsden, one of the Bank’s vice-governors, said on Wednesday he could see inflation – currently 2.5% – rise to 4% for a period later this year and conditions for more severe action could be met sooner than previously anticipated.
Saunders said in his speech that one course of action might be to stop the bank’s quantitative easing program early – the bond-buying policy that stimulates the money supply.
Previously, this idea had only been supported by the Bank’s former chief economist, Andy Haldane, who left to take charge of the Royal Society of Arts.
“In my opinion, if the activity and inflation indicators stay in line with recent trends and the downside risks to growth and inflation do not increase significantly (and these conditions are important) , then it might become appropriate fairly quickly to withdraw some of the current monetary stimulus. to bring inflation back to the 2% target on a sustained basis, ”Saunders said.
“In that case, options could include scaling back the current asset purchase program – ending it in a month or two and before the full £ 150 billion has been bought – and / or new monetary policy measures next year. “
Saunders said the modest tightening he might consider would still leave massive stimulus in place and therefore likely not derail the economic recovery and “more of slackening off the accelerator rather than slowing down.”
The Bank plans to expand its quantitative easing program to £ 895 billion, but has been surprised by the growing economy as foreclosure restrictions have been relaxed and the extent to which inflation has picked up.
“Activity appears to have recovered a little faster than the central forecast in the May Monetary Policy Report,” Saunders said.
In May, the Bank said inflation would exceed the government’s 2% target, but predicted the increase would be temporary.
Saunders has suggested that some of the price pressures driving inflation up may last longer. “The pressures on global manufactured prices reflect, at least in part, strong global demand for goods, including consumer goods, ICTs and investment in factories and machinery,” the economist said.
“These price pressures may well have lingering effects on UK CPI inflation, partly because of delays in the transmission of prices to consumers, but also because the underlying strength of demand and prices for manufactured goods can be persistent. “
Saunders added that despite improving employment prospects, there was likely still some slack in the job market.