By David Barwick – FRANKFURT (EconoStream) – The Bank of England will probably need to ease its policy stance yet further to mitigate the economic fallout from the pandemic, Michael Saunders, member of the BOE’s Monetary Policy Committee (MPC), said on Friday.

At an online webinar, Saunders highlighted a more pessimistic vision of growth and inflation than the BOE’s latest monetary policy report (MPR) and suggested that the labor market faced bleak prospects.

‘… my hunch is that risks lie on the side of weaker growth and a longer period of excess supply than forecast in the August MPR, and hence of a more persistent inflation undershoot’, he said. The materialization of such a scenario could lead to longer-term damage to the economy, he said, while policy constraints would make it ‘harder to return inflation to target from below than from above.’

From a risk management point of view, thus, the BOE ‘should lean strongly against downside risks at present’, he said. Observing that the MPC had already declared its willingness to adjust its stance as needed, Saunders said he deemed it ‘quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2% target.’

Should the strength of the recovery imply less need for accommodation, then the MPC will have sufficient time to head inflation off, he said.

‘But there is no automatic time limit on our willingness to maintain a loose monetary policy stance’, he said. ‘In particular, as the Committee noted in August, we do not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.’

Saunders characterized the last three months of economic developments as the reflection of ‘a relatively benign confluence of factors: fiscal support has remained very high, the easing of lockdown has allowed more spending including pent up demand, while the lagged effects of lockdown have kept infection rates low and reassured consumers.’

With an apparent resurgence of the pandemic, consumer confidence having plateaued and net fiscal support set to fall in the coming quarters, ‘even that very limited sweet spot may now be fading’, he said. The recent recovery is thus not a ‘strong signal that further upside surprises lie ahead’, he said.

In particular, as the furlough scheme winds down and labor market participation rises, unemployment is likely to increase ‘markedly’, he said. ‘The news in this respect is worrying’, he added, pointing to sharply lower vacancies and weak company hiring plans.