Bank of England’s Michael Saunders believes that it’s in the central banks’ best interest to hike interest rates quickly as consumer price inflation looms at multi-decade highs, according to his written speech Monday.
Saunders, who voted for an aggressive 50 basis point increase at the BOE’s meeting last week, warned that implied inflation may jump further from the central banks’ 2% target if the BOE acts slowly, according to the speech. The BOE on May 5 lifted its benchmark rate by 25 basis points to 1%, the highest level in 13 years.
If monetary policy reacts slowly to surging inflation and doesn’t move quickly to a more neutral stance, it “could ultimately require a sharper adjustment in monetary policy and the economy to return inflation to target, and result in an even worse outcome for real incomes and living standards,” Saunders explained.
Furthermore, not acting swiftly may raise concerns over the Monetary Policy Committee’s credibility. “The MPC’s ability to use monetary policy to provide effective support to the economy in 2020 rested on the credibility of the inflation targeting framework,” Saunders said. “That credibility is not infinite and cannot be taken for granted.”
In mid-March, the BOE hiked rates by 25 basis points to 0.75%.