Bank of England policy maker Michael Saunders said the decision to leave the European Union will have a long-term effect on the economy, though there’s still an argument to increase interest rates now.
In an interview in the Evening Standard newspaper, the external Monetary Policy Committee member said Brexit probably means the economy will grow “several percentage points less than it otherwise would do.” He added that it could be a “fairly sizeable” 5 percentage points less over the next 15 years.
“But that’s over a long period of time,” he said in the interview, published Friday. “Setting monetary policy, we’re not trying to determine the outlook for growth over the next 15 years, we’re thinking about the next couple of years and I doubt if those long-run effects of Brexit come through immediately.”
Tackling Inflation
Saunders, who has voted to increase the benchmark rate at each of the previous two meetings, said the BOE may have to be a “bit more activist” on tackling inflation pressures.
“The test will come going forward,” he said. “The amount of spare capacity is much less now than in the past few years. So it follows from that it would be normal for the response of policy, if growth surprises on the upside, to be a bit more activist than it has been in the past few years.”
Saunders, along with his fellow dissenter Ian McCafferty, maintained a push for a 25 basis-point increase at the BOE’s August’s meeting, which would reverse the rate cut put in place a year ago. In an interview with The Guardian last month he said that “households should prepare for interest rates to go higher at some point.”
He told the Standard that consumers have cut back spending a bit, but the risk of a major retraction hasn’t so far emerged. He said signs of a sharp slowdown across a range of business surveys might force a rethink, but his “hunch is that growth will be OK and the jobless rate will continue to fall.”
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