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Bank of England rate-setter Michael Saunders says rate hike needed faster than markets expect

Interest rates may have to rise faster than markets are pricing, according to one of the most hawkish members of the Bank of England’s monetary policy committee (MPC).

Michael Saunders today said that against a background of stronger inflationary pressures “rates might need to rise a little faster”.

Saunders was one of the three members of the rate-setting MPC to vote for interest rates to rise to 0.75 per cent at the last meeting in June, when chief economist Andy Haldane surprised City observers with a vote to hike.

The split vote highlights the difficult trade-off for the MPC, with what it sees as signs of rising inflation on the domestic front amid relatively weak economic data.

Speaking to CNBC, Saunders today said that he wants an “earlier return to a neutral rate” for monetary policy, at which it does not stoke further inflation.

He said: “I think the neutral rate is significantly lower than it used to be. And even if rates were to rise a little faster than markets price in I think that the general picture is still limited and gradual, not too far, and not too fast.”

A rebound in UK growth after a weak (albeit upwardly revised) GDP reading of 0.2 per cent in the first quarter and a “tightening in the labour market feeding through to pay growth” are key to the rates outlook, Saunders said.

Yet despite his hawkish message on rates, Saunders delivered a fairly downbeat assessment of the strength of the UK economy.

Brexit has held back the “big cyclical investment surge” which would normally be expected in similar economic conditions; “It’s clear that Brexit is dampening investment intentions compared to what we would otherwise have,” Saunders said, although adding that it has still grown.

The neutral rate for interest rates has been lowered by a combination of demographic pressures – with an ageing population – and lower productivity growth, he said, alongside tighter fiscal policy since the financial crisis.

Source: City A.M.