The Bank of England could raise interest rates while providing “considerable stimulus” to the British economy, a member of the monetary policy committee has said.
In a speech marking 10 months since Britain’s vote to leave the European Union last year, Michael Saunders said there were still many uncertainties about the direction of the UK economy.
But, he said, an interest rate increase did not need to be put on hold because of Brexit.
He said: “I do not believe the MPC is necessarily obliged to delay any policy moves until we have certainty over the exact shape of Brexit and its long-run effects on the economy.
“We make our decisions from meeting to meeting, and will fulfil our remit during the Brexit process and after it.
“Any policy decision carries risks that subsequent events make the decision controversial, but that is always the case.
“Perceptions of the economic outlook have already changed markedly in recent months and may well continue to do so.”
He predicted that inflation would reach 3 per cent either later this year or early in 2018.
This, Mr Saunders said, would squeeze household real incomes and spending as well as profits in sectors with high import content.
He also expressed scepticism that the increase in productivity seen in the last quarter of 2016, when output per hour went up 1.2 per cent, would be sustained.
Mr Saunders suggested that Brexit uncertainties had led firms to defer hiring despite solid activity growth, meaning there may be a catch-up in labour demand.
He said: “Unless the recent productivity pick up of H2 2016 is maintained – for which evidence currently is slim – economic growth of around 2 per cent implies that unemployment and under-employment are unlikely to rise in coming quarters and may well fall further.”
damian.fantato@ft.com
