BoE warns growth may remain weak

Bank of England (BoE) interest-rate setter Michael Saunders warned on Wednesday that Britain risks getting stuck in a low-inflation trap if the central bank does not take early action to boost the economy.

Saunders, one of the two top BoE officials who voted to cut rates in late 2019, said there was a risk that Britain’s economy would be weaker than his colleagues have predicted over the next couple of years.

“If we defer easing near-term and, in the event of persistent economic weakness, face the need for greater easing later on, then risks of a low-inflation trap - which would certainly not be a benign outcome - would rise,” he said.

Saunders remarks came shortly before official figures showed inflation dropped to its lowest in more than three years in December at 1.3 per cent, a bigger fall than any economist had forecast and well below the BoE’s 2 per cent target.

Saunders said it was too early to say if last month’s election had given the economy a boost, but any improvement was likely to be small.

“Remember that the starting point is that the economy has barely grown since early last year. So it could improve a bit, and growth would still be sluggish,” he said, after delivering a speech in Northern Ireland.

“It would take quite a marked bounce in growth in order to lift growth back to potential and to close the spare capacity which seems to have opened up in the last few quarters.”

Britain’s economy ground almost to a halt in late 2019, according to the most recent official data, as uncertainty about the Dec. 12 election and the possibility of a no-deal Brexit shock as soon as Jan. 31 weighed on confidence.

Some surveys have suggested that companies turned more optimistic after Prime Minister Boris Johnson won a big parliamentary majority.

Reuters