Michael Saunders surprised many when he voted in June for the Bank of England to increase interest rates.
The former Citigroup economist, who joined the Bank’s nine-strong monetary policy committee (MPC) last year as one of the four external members, warned that the UK economy was performing well enough for inflation to become a challenge. The response, he said, should be a modest rise in the cost of borrowing for businesses and households.
Within days he encountered a distinct problem. Official figures showed inflation falling back. Over the summer the annual rise in consumer price inflation (CPI) declined from a peak of 2.9% to 2.6%. Worse was to come. Consumer and business confidence data showed both groups were becoming more nervous about the future.
Later, figures from the Office for National Statistics showed GDP growth failed to rebound from its miserable performance in the first quarter. It was stuck in the slow lane, only inching higher from 0.2% in the first three months of 2017 to 0.3% in the second.
Surely the gloomy data was a humiliating blow to Saunders’ forecasting prowess. He reckoned inflation was heading upwards to 3% and possibly beyond. The hard facts pointed in the opposite direction.
Undaunted, he voted again on 3 August for a 0.25 percentage point rise.
A speech on Thursday in Cardiff provided Saunders with the perfect platform for an admission that he had mistimed his interest rate call.
But far from it. He maintained his warning, claiming that the fall in inflation was temporary and it was still in danger of becoming entrenched. His explanation centred on three things that would force employers to hike pay rates. First, that unemployment would stay low despite Brexit jitters. Second, that a flight of EU nationals back across the channel would restrict the supply of labour, putting upward pressure on wages. Third, he pointed to studies that showed most workers are unwilling to take on more hours.
It is true that some industries are already screaming for skilled staff. The construction industry is certainly under pressure to find people to fill the holes left by departing Polish and Lithuanian workers.
As for evidence that the impact is feeding through to the broader economy. There isn’t much more to go on.
At the moment the only harm to the economy flows from the EU referendum. In the first instance there was the uncertainty that killed off business investment. A year after the vote, businesses remain reluctant to buy new equipment or expand capacity.
Subsequently, the low pound pushed up the cost of imported goods, hitting disposable incomes.
Saunders probably feels safe from criticism after his colleague Ian McCafferty joined him in calling for a rise and the Banks’ governor, Mark Carney, almost went as far, hinting that a tougher regime might be necessary before the end of the year. Andy Haldane, Threadneedle Street’s chief economist, was another to say he could envisage a base rate of 0.5% before Christmas.
Which leaves us to ponder the forecasting prowess of the MPC as a whole. It beggars belief that while the government maintains its austerity drive and businesses consider the known unknowns thrown up by the Brexit talks, why the central bank would withdraw just about the only support the economy has from an agency of the state.
Carney and his team do themselves little credit when they talk about raising rates and winding down quantitative easing while the status quo persists. If they urged the government to push ahead with extra spending on infrastructure and higher pay for nurses and teachers as a way to stimulate the economy, allowing the Bank to withdraw its own, that would make sense.
But while the UK resembles a hospital patient on heavy medication, albeit out of intensive care, withdrawing the only stimulant that still works would surely be negligent.
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