Former Bank of England policy maker Michael Saunders said Britain’s inflation rate is likely to drop well below the central bank’s expectations, opening the possibility that interest rates have already peaked.
(Bloomberg) — Former Bank of England policy maker Michael Saunders said Britain’s inflation rate is likely to drop well below the central bank’s expectations, opening the possibility that interest rates have already peaked.
“There’s a strong likelihood that inflation will undershoot the Bank of England’s forecast by quite a large margin in April,” Saunders said Thursday in an interview on Bloomberg TV. “Interest rates may well have peaked. If they go up, it’s only one further hike. But I’d say this big tightening cycle since late 2021 is now probably over.”
The remarks are significant because Saunders was among the most hawkish of the BOE’s nine Monetary Policy Committee members until he left the panel in August. While Governor Andrew Bailey signaled rates may head higher yet, Saunders has turned more dovish and says officials should focus on the factors that may drag inflation significantly below the 2% target.
Now an adviser to Oxford Economics, Saunders said the BOE’s latest inflation forecast for over 8% in the second quarter is “well above consensus.”
“Given the drop in energy prices which is going to feed through and the weakness in the survey guide to firms’ pricing, I think it’s more likely that inflation in this quarter will be close to 7%,” he said. “That’s really quite a big undershoot. If it comes out like that, it would be the biggest undershoot in 20 years. If that comes through I think the likelihood is that interest rates will not be going up again.”
Saunders also said Prime Minister Rishi Sunak’s promise to cut inflation in half this year depends on factors not in his control — especially energy prices.
“The chances are he’s going to meet his target,” Saunders said. “It would be better – more meaningful – to focus on trying to improve people’s living standards for a sustained, long period of time because that’s something we haven’t had for the past 10 to 15 years.”
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