BOE’s Saunders: Joblessness Forecast Not Consistent with Policy Tightening

26 March 2021

By David Barwick – FRANKFURT (Econostream) – The Bank of England’s expectations regarding UK unemployment are not consistent with a sustainably closed output gap and thus with meeting the conditions of its forward guidance for policy tightening, Michael Saunders, member of the BOE’s Monetary Policy Committee (MPC), said on Friday.

In a speech for an online webinar, Saunders said with respect to the MPC’s forward guidance – namely that it ‘does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably’ – that the central forecast ‘might imply the conditions for tightening will be met quite soon.’

However, he continued, ‘these conditions are necessary but not sufficient for tightening: the Committee won’t tighten before those conditions are met and will then judge according to the situation.’

Moreover, it has to be ‘relatively unambiguous’ that the conditions for tightening have been met, and it cannot be on a transitory basis or simply reflect a temporary reduction in potential output, he said.

‘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’, he said.

As to the guidance that ‘[i]f the outlook for inflation weakens, the Committee stands ready to take whatever additional action is necessary to achieve its remit’, Saunders said that energy prices could cause headline inflation to rise going forward, even if the output gap persists.

‘But it would probably keep core inflation subdued for longer than the MPR projects hence, unless energy prices go on rising, tilting the medium-term outlook to below-target inflation’, he said. ‘Risk management considerations also could apply, 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.’

The MPC has the wherewithal to tighten or relax policy as needed, he said. In the latter case, besides forward guidance and more QE, ‘a zero or negative policy rate will also be feasible from the August policy meeting onwards’, he said.

The actual choice in this case ‘might depend on the circumstances and allow for any complementarities between them’, he said. ‘Either way, the MPC will, as always, remain focussed on ensuring that inflation returns sustainably to the 2% target, in a way that supports output and jobs.’