Michael Sanders, who is leaving Threadneedle Street’s monetary policy committee (MPC) next month, said he backed tighter policy because the risks of doing “too little, too late” outweighed the risks of doing “too much, too soon”. In a laudatory speech at the Resolution Foundation thinktank, Saunders said further increases in official borrowing costs were needed even though the economy had slowed in recent months. Economist polls and the view of financial markets suggest that UK interest rates will rise from their current level of 1.25% to 2% or even higher next year, Saunders said. “I do not regard such an outcome as improbable or improbable,” he added. Sanders was one of three members of the Bank’s nine-strong MPC to vote for a half-point increase when rates rose from 1% to 1.25% last month. With the annual rate of inflation expected to approach 10% when the latest cost of living figures are released later this week, a further rate hike is expected at the MPC meeting in August. Sanders said a series of negative shocks – including Brexit, the Covid-19 pandemic and spiraling energy prices – reduced the rate at which the economy could grow without creating higher inflation. “The deterioration of potential output in recent years means that capacity pressures are widespread even with GDP slightly above the pre-pandemic level,” he said. There were signs that economic activity was slowing as rising prices eroded living standards, the MPC member added. “But this slowdown must be measured in the context that the economy at the start of this year was in excess demand, potential growth is low, hiring difficulties are high and there is a significant backlog of unmet labor demand,” he said. “Furthermore, since the May monetary policy report forecast, the government has announced further fiscal support measures.” Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk Sanders said his view was that a further rate hike was likely and indicated he would vote again for a half-point increase next month. “Overall, the MPC needs to balance the risks and costs of tightening ‘too, too soon’ against ‘too little, too late.’ In my view, the cost of the second outcome – not being strict enough – would be relatively high at present. “With excess demand and elevated inflation, ‘too little, too late’ will increase the likelihood that recent trends in underlying wage growth, longer-term inflation expectations and business pricing strategies will become more firmly embedded,” Sanders said.
