Bank of England’s Saunders: inflation could force interest rate rise next year

‘Relatively limited’ increase could be needed if inflation is persistent, says member of rate-setting committee

The Bank of England could be forced into action to raise interest rates next year if inflation remains persistently higher than expected, one of Threadneedle Street’s policymakers has said.

Michael Saunders, one of nine members of the Bank’s monetary policy committee, said a rise in borrowing costs could be warranted before the end of 2022 if the UK’s economic recovery from lockdown is maintained and the rate of inflation sticks at elevated levels.

“If the economy continues to recover, and inflation shows signs of being more persistent, then it might be right to think of interest rates going up in the next year or so. But that is not a promise and depends on economic conditions,” he told an online event hosted by accountancy software company Intuit.

Signalling concern over a burst of inflationary pressure rippling through the British economy, he said the time was moving closer to withdraw high levels of emergency economic stimulus. However, any rate increase would be “relatively limited”.

He added that a rise in borrowing costs next year was “not a promise”, as it would need to depend on economic conditions.

Saunders, who voted last month to cut short the Bank’s £895bn quantitative easing bond-buying programme, said he was worried that continuing with asset purchases could stoke expectations among households and businesses for inflation to drift higher.

“Such an outcome could well require a more substantial tightening of monetary policy later, and might limit the committee’s scope to respond promptly the next time the economy needs more stimulus,” he said.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

His comments come after Catherine Mann, the newest external rate-setter at the central bank, said inflation would prove less sticky than in the 1970s. Speaking earlier this week, Mann said firms could be more reluctant than in the past to hit households with higher prices for goods and services, and that a historic link between inflation and wages had diminished in recent times.

Financial market expectations were already for a rate rise in 2022 before Saunders’s comments, with most City economists anticipating the central bank will move to tame inflationary pressures next year.

Threadneedle Street forecasts inflation could rise close to 4% this year, the highest rate for a decade. However, much of the increase is down to the economy recovering from its historic slump in 2020, rather than a sharp jump in consumer prices. The Bank expects pressures linked to pandemic disruption to fade over time, bringing inflation back towards its 2% target rate.


Richard Partington Economics correspondent

The GuardianTramp

Related Content

Article image
Bank of England rift as chief economist ponders interest rate rise
Andy Haldane reveals he seriously considered opposing governor Mark Carney in MPC vote earlier this month

Larry Elliott Economics editor

21, Jun, 2017 @11:09 AM

Article image
Bank of England under pressure to increase interest rates after inflation rise
Increase to 4.2% in October from 3.1% driven by squeeze on living standards and soaring energy bills

Richard Partington Economics correspondent

17, Nov, 2021 @5:19 PM

Article image
Bank of England must be wary of interest rate rise, says chief economist
Andy Haldane says UK at risk of sharp slowdown as BoE weighs up conflicting forces of inflation from weak pound and the Brexit vote denting confidence

Katie Allen

02, Dec, 2016 @2:37 PM

Article image
Bank of England's Michael Saunders: 'Prepare for higher interest rates'
The MPC member on why he voted for a rise – and why policymakers should not hold fire during Brexit talks

Katie Allen and Larry Elliott

04, Jul, 2017 @7:34 PM

Article image
Bank official warns of early interest rate rise as Kraft Heinz puts up prices
Baked beans maker is latest firm to talk of food price rises, as inflationary pressures mount

Angela Monaghan and agencies

10, Oct, 2021 @3:39 PM

Article image
Bank of England warns inflation will hit 4% this year but holds interest rates
Monetary policy committee resists pressure to increase the cost of borrowing, but hints at rise next year

Phillip Inman

05, Aug, 2021 @11:13 AM

Article image
Bank of England’s Andy Haldane warns over UK inflation risk
Chief economist says Britain could face ‘nasty surprise’ in wake of US rise

Rob Davies

25, Jun, 2021 @4:02 PM

Article image
UK interest rate rise likely as inflation hits 3%
Speculation rife Bank of England may raise rate for first time in a decade as governor Mark Carney predicts prices will rise further

Larry Elliott Economics editor

17, Oct, 2017 @9:26 AM

Article image
Interest rates dilemma puts spotlight on Bank of England’s credibility
As markets bet on an increase, economists give their view after Andrew Bailey’s mixed messages

Richard Partington Economics correspondent

19, Oct, 2021 @5:00 AM

Article image
The Brexit economy: looming rate rise clouds outlook as inflation dips
‘The beast from the east’ blew the UK economy off course, further complicating an already complex picture

Richard Partington

26, Apr, 2018 @12:21 PM