By Ian McConnell

A RISE IN benchmark UK interest rates to two per cent or higher within the next year is not “unlikely or implausible”, a member of the Bank of England’s Monetary Policy Committee has declared.

Michael Saunders, who voted unsuccessfully for a half-point rise when the nine-strong MPC voted to increase UK base rates by a quarter-point to 1.25% last month, said in a speech at the Resolution Foundation think-tank in London: “The precise path of future monetary policy is, of course, inherently uncertain, because it will depend on future economic developments that cannot yet be foreseen. But I note that the BoE market participants survey and the Treasury’s survey of external forecasters both suggest that Bank Rate will rise to around 2% in the next year.

“Market pricing is even higher. Neither the external consensus nor the path of inflation break-evens implies that such a rate path will leave inflation below target over time. Without wishing to endorse those views too strongly, I do not regard such an outcome (ie that Bank Rate will have to rise to 2% or higher during the next year to return inflation to target) as implausible or unlikely."

He added: “But, rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may, in my view, still have some way to go.”

UK base rates have been increased from an all-time low of 0.1% late last year, as inflation has surged.

Annual UK consumer prices index inflation had by May risen to 9.1%, more than four-and-a-half times the 2% target set for the Bank of England by the Treasury.

Mr Saunders said: “My own view is that further monetary tightening is likely, and indeed, as evident from my votes at the MPC’s recent policy meetings, my preference has been to tighten relatively quickly.”

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He added: “This partly reflects my view that risks are tilted on the side of a more persistent period of excess demand and domestic inflation pressures than implied by the most recent MPR (monetary policy report) forecast, published in early May. Despite the inflation-induced erosion of real incomes, I put more emphasis on risks that the backlog of unmet hiring needs and low labour supply will keep the labour market very tight. In turn, I expect that spending will be underpinned by low unemployment, the household and corporate savings accumulated during the pandemic, and the fiscal support measures announced in recent months.

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“Moreover, unless restrained by tighter monetary policy, the relatively high level of longer-term inflation expectations implies that domestic cost growth and firms’ pricing strategies may remain above target-consistent rates even if capacity pressures ease to more normal levels. Risk considerations also influence my policy views. In broad terms, the MPC has to balance the risks and costs of tightening ‘too much, too soon’ versus ‘too little, too late’. In my view, the cost of the second outcome – not tightening promptly enough – would be relatively high at present.”