MPC member favours 'prompt tightening' of interest rates

Saunders voted for a larger 50bp increase in interest rates at the MPC's February meeting, but stressed that "does not necessarily imply that I will vote for 50bp steps in the event that rates have to rise further".

However, during a speech at the University of East Anglia, he said that "risks are on the side of stronger and more persistent inflation pressures than implied by the February MPR forecast".

Saunders added that recent growth in energy prices is likely to lift CPI inflation further in coming months. Although this effect is likely to be temporary, he said there are also "clear signs of pressures – in terms of capacity use, inflation expectations, firms’ pricing strategies and pay growth – that threaten to keep CPI inflation above the 2% target even once energy effects fade, unless restrained by monetary policy".

As a result, Saunders believes that, "in line with other MPC members, I expect that we will need some further monetary tightening in the coming months to return inflation to target".

Saunders continued: "Reflecting my view of the balance of risks around the MPR forecast, my preference is to move quite quickly towards a more neutral stance in order to prevent the recent trend of higher inflation expectations and rising pay growth from becoming more firmly embedded.

"Maintaining a relatively loose policy stance under current conditions would be likely to produce a further undesirable rise in inflation expectations. Such an outcome would be costly to reverse and could limit the scope for prompt monetary easing the next time the economy needs support."