Bank's new MPC member: a dovish hawk with a City pedigree


Michael Saunders has a reputation as a hawk, who in recent years believed the economy to be in rude health and in need of higher interest rates to suppress inflationary pressures.

Last year he argued that the Bank of England’s outlook for growth and inflation was overly gloomy and interest rate rises would arrive sooner than the monetary policy committee (MPC) forecast. The year before he said much the same.

As it turned out, Threadneedle Street was overly optimistic and from last summer almost all measures of the economy’s health have shown it suffering from a severe cold. Interest rates are not due to rise until 2019, according to market expectations.

In that sense, Saunders would be in the same category as Iain McCafferty, the MPC member who hails from the CBI – the business lobby group, and the man Saunders replaces – Martin Weale. They both voted for rate rises when others were arguing higher borrowing costs would damage the recovery.

A like-for-like replacement for Weale is no bad thing. The MPC needs to have some debate and dissenting voices. What is unfortunate is that Andy Haldane, the Bank’s chief economist, is alone on the other side of the debate. Haldane has hinted that further shocks to the economy could force the bank to cut rates further, not increase them.

Saunders, by contrast, has gone on record saying that even a referendum vote to quit the EU would not alter his view that interest rates are on an upward path.

Weale proved to be hawk despite supporting causes that gave him a radical demeanour and might have put him in the dovish camp. For instance he held longstanding concerns about the plight of young people in the labour market and supported a shift from taxing income to taxing wealth.

Likewise, Saunders might confound observers once inside the Bank of England. Some commentators argue his analysis can be read as more centrist than Weale and in some respects dovish.

Yet unlike Weale, who was an academic who headed the National Institute of Economic & Social Research, Saunders hails from the City, as does deputy governor Ben Broadbent, who worked at Goldman Sachs, Gertjan Vlieghe, an economist at the hedge fund manager Brevan Howard and the governor, Mark Carney, another Goldman Sachs alumnus.

Citibank’s embarrassments are well behind it, but still represent a skeleton in its cupboard. It was almost bankrupted in the 2008 crash before being saved by an injection of funds from the middle east and a bailout by the US central bank, the Federal Reserve.

Its boss at the time, Chuck Prince, became notorious for explaining why the bank kept borrowing on the international money markets long after the sub-prime crisis had emerged with the comment “as long as the music is playing, you’ve got to get up and dance. We’re still dancing”.

It’s a comment that represented the detachment of Wall Street from Main Street. Let’s hope Saunders has his feet more firmly on the ground.

Powered by article was written by Phillip Inman Economics correspondent, for on Friday 15th April 2016 17.34 Europe/ © Guardian News and Media Limited 2010


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