Second BoE official says time to slow stimulus may be near (updated)
15/07/2021 11:25
* Saunders - QE could entrench high inflation expectations
* Curtailing bond-buying to be discussed by BoE
* BoE might need to act "fairly soon"
* Comments echo those of BoE's Ramsden on Wednesday
* Sterling, government bond yields rise
(Adds background and quotes)
By David Milliken and William Schomberg
LONDON, July 15 (Reuters) - The Bank of England 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, Saunders on Thursday said
continuing bond purchases later this year - when inflation could
exceed 3% - risked entrenching higher inflation expectations.
British consumer price inflation jumped to 2.5% in May -
further above the BoE's 2% 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. urn:newsml:reuters.com:*:nL8N2OR1D8
"For me, the question of whether to curtail our current
asset purchase program early will be under consideration at our
forthcoming meetings," 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.
Sterling jumped around half a cent against the dollar and
the euro after Saunders's remarks, and British government bond
prices fell on the prospect of an end to BoE purchases, taking
two-year gilt yields GB2YT=RR to a three-week high.
Investors bet more heavily on a first 15 basis-point
increase in Bank Rate to 0.25% coming by August 2022.
The BoE committed in November 2020 to buy a further 150
billion pounds ($208 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.
TRANSATLANTIC SHIFT
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, 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% this year, and the BoE could need to reverse its
monetary stimulus sooner than he had expected. urn:newsml:reuters.com:*:nL8N2OQ59F
Governor Andrew Bailey and another deputy governor, Jon
Cunliffe, have recently given little away about their views on
the likely persistence of inflation. urn:newsml:reuters.com:*:nL1N2OR0B9 urn:newsml:reuters.com:*:nL9N2M8023
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.
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 2-3 years ahead are balanced around the 2%
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, 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.
($1 = 0.7200 pounds)
(Writing by David Milliken
Editing by William Schomberg, William Maclean)
((william.schomberg@thomsonreuters.com; +44 207 542 7778;
Reuters Messaging: william.schomberg.reuters.com@reuters.net))