Michael Saunders: ‘Currently, the effectiveness of any single policy tool in providing further stimulus — bank rate, asset purchases or guidance — may be less than usual or more uncertain than usual’ © Financial Times

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A member of the Bank of England’s Monetary Policy Committee contradicted the bank’s governor on Friday, saying that Covid-19 vaccines did not materially change the economic outlook for the UK and the BoE’s tools to support the economy were less effective than normal.

The speech by Michael Saunders, one of the MPC’s external members, contrasts with Andrew Bailey’s public view that the central bank has ample “firepower” to boost economic activity and that coronavirus vaccines were “very encouraging” for the UK economy.

MPC members are encouraged to air their differences in public to improve the transparency of interest rate setting, but this rarely happened when Mark Carney was governor and more recently members have still been reluctant to diverge from a unified message.

Mr Saunders’ willingness to speak out signals a return to more normal monetary policymaking in the UK.

He said that, although the BioNTech/Pfizer vaccine approval was “clearly encouraging”, the MPC had already factored the development of vaccinations into its November forecasts. By contrast, over the months ahead, the government’s restrictions on social interactions were stricter than assumed in the forecasts.

While opening up the economy next year might lead to a release of unintended savings, Mr Saunders noted that higher savings rates were largely a feature of richer people and financial stress was more likely to be the concern next year for many more households.

With Brexit uncertainty, higher unemployment and much higher corporate debt, he said that coronavirus was likely to leave a lasting “hangover” and “a relatively slow recovery” was on the cards.

“Monetary policy may need to do more if these downside risks develop, in order to provide a bridge for the economy during the period of restrictions, and to underpin recovery as restrictions ease,” he said, adding that it made sense to be more aggressive than usual to avoid getting stuck in a low inflation, high unemployment trap.

The problem facing the MPC, he said, was that the BoE’s existing monetary policy tools were likely to be ineffective on their own in boosting demand and spending.

“Currently, the effectiveness of any single policy tool in providing further stimulus — bank rate, asset purchases or guidance — may be less than usual or more uncertain than usual,” he said.

To be more aggressive, he said there was scope for the BoE to use all three tools simultaneously because at very low interest rates there would be more synergy between them.

He suggested the central bank should also consider providing a greater effective subsidy to banks that were willing to increase lending to business, copying action by the European Central Bank that has been effective.

“If more stimulus is needed then, rather than lean ever more heavily on a single policy tool, in my view the most effective means may be to use a range of policy tools,” Mr Saunders said.

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