LONDON (Reuters) -Bank of England policymaker Michael Saunders said on Friday there might be more spare capacity - meaning potentially less inflation pressure - in Britain’s economy after its COVID crash than the central bank said last month.
Saunders said Britain’s economy might recover from last year’s 10% slump more quickly than the BoE’s central forecasts, made in early February, which foresee a 5% bounce-back in 2021 as the country races ahead with coronavirus vaccinations.
But that did not automatically mean inflation pressure will surge too because of slack in the economy that Saunders said may well be “much greater” than the BoE assumed in its forecasts last month.
“My hunch, taking account of a somewhat more optimistic assessment of the outlook for potential output, is that it will take longer to close the output gap than forecast in the February MPR (Monetary Policy Report),” Saunders said in a speech.
“Risk management considerations” might be needed when it comes to considering how much stimulus Britain’s economy still needs “because an incomplete recovery and persistent output gap would be a more costly outcome than a scenario in which the output gap closes at an earlier date.”
His comments contrast with those of BoE Chief Economist Andy Haldane who has warned of a potential inflationary “tiger” as the economy bounces back.
Saunders said the unemployment rate would be a good future benchmark in judging the extent to which the output gap is closing.
“In my view, a jobless rate of well above 5% (the February MPR forecast for Q1-2022 was 5.7%) would almost certainly indicate that we are some way from closing the output gap sustainably,” Saunders said.
