'˜Modest' interest rate rise is needed, says MPC member

Interest rates have been held at 0.25% amid lacklustre economic growth. Picture: Scott Barbour/Getty Images

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A key Bank of England policymaker has said a 'modest' interest rate hike is needed to curb surging inflation and warned over getting 'behind the curve'.

Michael Saunders, one of the bank’s monetary policy committee (MPC) members who voted in June and August to raise rates, said an increase would “help ensure a sustainable return of inflation to target over time”.

In a speech in Cardiff, he said the trade-off of putting up with soaring inflation to boost the economy in the face of Brexit uncertainty was now beyond his “limits of tolerance”.

He added: “We do not need to be putting the brakes on so much that the economy weakens sharply. But, our foot no longer needs to be quite so firmly on the accelerator in my view.”

Saunders, whose term at the MPC runs until August 2019, said he did not want to “dismiss risks that the Brexit process might be bumpy”. But he said the bank should respond “as needed” rather than by keeping rates at the current all-time low of 0.25 per cent in case risks to the economy emerge.

He also warned that if early action is not taken, rate rises might end up being more dramatic to prevent the economy from overheating, which could prove a shock to homeowners, many of whom have never had to face a rate rise.

“In that case, the eventual tightening might be rather less limited and gradual than desired, leading to a more abrupt and painful economic slowdown,” he said.

“It would be preferable to have the space to move gradually, observing the effects as we go. If we get behind the curve, we lose that space.”

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Saunders has been among a minority on the MPC voting to raise rates to 0.5 per cent in recent months amid inflation fears. He and Ian McCafferty were the only members to vote last month to increase rates, with the majority preferring to hold rates amid lacklustre economic growth.

But Bank of England governor Mark Carney signalled that borrowing costs may need to rise quicker than markets expect to cool inflation, which reached 2.6 per cent in July. The bank predicts it will peak at close to 3 per cent in October.

Carney also warned that the economy will remain “sluggish” as Brexit hits households and businesses, and Saunders echoed Carney’s fears, but said rates could “in theory go either way”, depending on various factors, and should not be kept at record lows now as an insurance policy.

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