Second Bank of England official says time to slow stimulus may be near

Published Thu, Jul 15, 2021 · 08:50 PM

[LONDON] THE Bank of England (BOE) could stop its government bond purchases early due to an unexpectedly sharp rise in inflation, interest rate-setter Michael Saunders said, the second top BOE official in two days to signal a possible reining in of its stimulus.

After Deputy Governor Dave Ramsden said on Wednesday the time for action might be approaching, Mr Saunders on Thursday said continuing bond purchases later this year - when inflation could exceed 3 per cent - risked entrenching higher inflation expectations.

British consumer price inflation jumped to 2.5 per cent in May - further above the BOE's 2 per cent target - and job creation in June was the strongest since the pandemic, pushing up wage growth by the most on record albeit with pandemic distortions.

"For me, the question of whether to curtail our current asset purchase program early will be under consideration at our forthcoming meetings," Mr Saunders said in a speech.

"If activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly ... then it may become appropriate fairly soon to withdraw some of the current monetary stimulus."

The BOE is due to announce the outcome of its next policy meeting and publish new forecasts on Aug 5.


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Sterling jumped around half a cent against the dollar and the euro after Mr Saunders's remarks, and British government bond prices fell on the prospect of an end to BOE purchases, taking two-year gilt yields to a three-week high.

Investors bet more heavily on a first 15 basis-point increase in Bank Rate to 0.25 per cent coming by August 2022.

The BOE committed in November 2020 to buy a further £150 billion (S$281.55 billion) of government bonds over the course of the following year.

Chief Economist Andy Haldane was a lone voice at May and June's Monetary Policy Committee meetings - his last before leaving the BOE - to call for the scheme to be ended early.


As in the United States, where some Federal Reserve officials have argued the time for slowing bond-buying has come sooner than they had thought, Mr Saunders's comments added to signs of a change in stance, at least among some BOE policymakers.

On Wednesday, Deputy Governor Dave Ramsden said inflation could hit 4 per cent this year, and the BOE could need to reverse its monetary stimulus sooner than he had expected.

Governor Andrew Bailey and another deputy governor, Jon Cunliffe, have recently given little away about their views on the likely persistence of inflation.

Until now, the BOE has said inflation pressures from higher energy prices and supply-chain bottlenecks would be temporary, as Western economies adjusted to reopening after the pandemic.

Mr Saunders said higher short-term inflation caused by energy prices was not something the BOE could tackle, but he was concerned that other price pressures could persist over the two- to three-year time horizon the BOE uses to target inflation.

"A modestly tighter stance ... would help ensure that inflation risks two to three years ahead are balanced around the 2 per cent target, rather than tilted to the upside, which I suspect is the case with the current policy stance," he said.

Options for tightening policy included ending the bond purchase programme in the next month or two, before it is due to end in late 2021, and further monetary policy action in 2022, he added.

Any initial moves to scale back the BOE's support for the economy would be modest, Mr Saunders said.

"It would still leave in place considerable stimulus and hence probably not derail the welcome recovery in the economy: it would be more akin to easing off the accelerator rather than applying the brakes," he said. REUTERS

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