MPC still has room to act if needed, BoE's Saunders says

The Bank of England continued to enjoy "considerable flexibility" to respond to economic developments, whether they be positive or negative, the Monetary Policy Committee's newest member said.

In remarks prepared for a speech, Michael Saunders said: "But, my key point is that the MPC does still have considerable flexibility to respond to economic developments, in either direction, in order to help stabilise the economy and anchor inflation close to target over time, even if not exactly at 2% every month."

Nonetheless, Saunders admitted that even after the recent monetary stimulus adopted by the BoE, the economy would probably slow over the next year or two, although he did sound an optimistic note on that score.

Faced with an "exceptional" shock, at its last policy meeting the MPC had chosen a middle-path between delivering lower unemployment when looking two to three years ahead, instead of keeping inflation at target at that same time horizon (and risking an 'undershoot' further out), the policymaker explained.

Inflation was now expected to fall back to target just past the Bank's forecast horizon, Saunders said.

The ex-Citi economist also centred his speech on two aspects in which his view of the current economic landscape differed from that of the rest of the MPC.

He believed the equilibrium rate of unemployment in the UK was lower than the 5% estimated by the MPC and that the economy would not slow by as much as the Committee had expected, in August, over the next year or two.

Saunders explicitly ruled out providing any hints on how he would vote at the next policy meeting but emphasised there remained "substantial scope" for stimulus through asset purchases if needed, although there was now only limited scope to cut Bank Rate.

Tentative evidence also pointed to supply factors - one of the UK's strong points - becoming more important in determining countries' ability to grow, he went on to say.

"Most analysis", including those from the International Monetary Fund and the Organisation for Economic Cooperation and Development, pointed to a modest adverse impact on the UK's potential rate of growth over time, the next 15 years or so, he said.

He also mentioned how a "few studies" showed that net economic benefits might accrue to Britain upon exiting the European Union, particularly were it accompanied by economic flexibility or if it was able to quickly renegotiate new trade agreements with other economies, leading to a rapid expansion in trade.