Sterling began to climb from its early morning slide this afternoon, as a more hawkish Bank of England policymaker trampled on governor Mark Carney's warnings that an interest rate hike might not be imminent.
Michael Saunders, speaking at the University of Strathclyde in Glasgow, said he was sticking by his minority decision to raise interest rates by another 0.25 per cent in March.
His comments came after Carney implied in a BBC interview last night that market watchers might not be safe in assuming a rate hike would come in the Monetary Policy Committee (MPC)'s 10 May meeting.
Read more: Sterling continues to slide as May interest rate hike bets shrink after Carney's hesitant comments
Yet Saunders struck a much more hawkish note. "With spare capacity largely used up and cost pressures rising, I believe the economy no longer needs as much stimulus as previously," he said.
"Rather, we probably need to move over time to something more like neutral, in order to ensure a sustainable return of inflation to target."
Saunders also seemed to brush off Carney's warning that a rate hike might not come next month, saying that though tightening of monetary policy should be "gradual" this need not mean "glacial".
Carney has pointed to "softer" recent economic data as a reason for holding back interest rate hikes. Just this week, wage growth figures were released which were improving but lower than forecast, inflation growth was down to a one-year low on Wednesday and retail figures were revealed to have taken a hit from the "Beast from the East" weather front on Thursday.
Read more: Bank of England policymakers vote 7-2 to hold interest rates, but hint at a May hike
Yet Saunders believes that "with continued growth in the economy, spare capacity has fallen further", and the MPC predicts that the output gap will close "over the next year or so".
"With the prospect that the output gap will close, the horizon at which we seek to return inflation to target shortens and becomes more conventional," Saunders said.
"I share that general outlook. But I expect that capacity pressures – especially in the labour market – will probably be a bit greater than the IR [Inflation Report] base case, hence reinforcing upward pressures on pay growth and domestic costs."
Sterling climbed to $1.4072 after Saunders' speech from day lows of $1.4036, but had begun to sink again in afternoon trading.
[contf]
[contfnew]
CityAM
[contfnewc]
[contfnewc]
