Michael Saunders of the Bank of England believes it is in the interest of central banks to increase interest rates rapidly as consumer price inflation looms at multi-decade highs, his writing says speech Monday.
Saunders, who voted for an aggressive 50 basis point hike at the BOE meeting last week, warned that implied inflation could drift away from central banks’ 2% target if the BOE takes action. slowly, according to the speech. On May 5, the BOE raised its benchmark rate by 25 basis points to 1%, the highest level in 13 years.
If monetary policy responds slowly to soaring inflation and does not move quickly to a more neutral stance, it “may ultimately require a more pronounced adjustment in monetary policy and the economy to bring inflation back to goal, and result in an even worse outcome for real incomes and living standards,” Saunders explained.
Also, failure to act quickly may raise concerns about the credibility of the monetary policy committee. “The MPC’s ability to use monetary policy to provide effective support to the economy in 2020 hinged on the credibility of the inflation targeting framework,” Saunders said. “This credibility is not infinite and cannot be taken for granted.”
In mid-March, the BOE raised rates by 25 basis points to 0.75%.