BoE’s Saunders Uncomfortable with UK inflation expectations

Bank of England external Monetary Policy Committee member Michael Saunders said on Monday that he is uncomfortable with where inflation expectations currently are and that interest rates below 1.0% are clearly below the neutral rate in the UK.

Interest rates in the UK might need to go above neutral if inflation expectations go higher, Saunders added, though he said this was not his base case and didn’t outline exactly where he thinks the neutral rate of interest is. Saunders added that there is good reason to expect the effect on the economy from selling gilts will be smaller than from their initial purchase. That is because the sale of gilts does not contain a policy signal from the BoE, unlike purchases, he noted.

The BoE’s benchmark interest rate is the bank’s primary tool for tightening policy, Saunders continued, adding that gilt sales are complimentary, but not a substitute.