Europe News

Bank of England hawk says UK rates may rise faster than the markets are expecting

Key Points
  • Market players have priced in a little bit more than one hike in rates over the next year.
  • But, according to Michael Saunders, a member of the monetary policy committee, this might be too cautious.

The Bank of England (BOE) might surprise markets with a faster increase in interest rates than is currently expected, a member of the central bank's Monetary Policy Committee told CNBC Tuesday.

Market players have priced in a little bit more than one rate hike over the next 12 months. But, according to the BOE's Michael Saunders, this might be too cautious.

"If the economy plays out as I expect, it may be that rates need to go up a little faster than that," Saunders told CNBC's "Street Signs" in reference to market expectations.

BOE’s Saunders: Investment has grown at a modest pace despite Brexit

Saunders, who's described as one of the more hawkish members of the central bank and actively votes for rate hikes, also said: "My expectation, conditioned on Brexit unfolding in sort of a smooth and gradual way, the economy will continue to grow at around the pace we have seen over the last couple of years ... (I) expect the jobless rate to fall a little further; and pay growth will pick up a bit.”

“Against that background, I think that yes, rates might need to rise a little faster," he added.

BOE’s Saunders: Trade jitters not having major effect on export growth

At the bank's last meeting in June, members decided to keep rates unchanged at 0.5 percent. However, the details of the decision showed that three out of the nine policymakers were in favor of a rate increase to 0.75 percent.

Some analysts believe that this split vote could mean a rate increase as early as next month.

However, Saunders highlighted that even if rates go up at a faster pace than markets expect, this will be done in a gradual way.

"The general picture is still limited and gradual, not too far and not too fast," he said.

BOE’s Saunders: Investment has grown at a modest pace despite Brexit

Keeping 'a close eye' on global trade

Saunders admitted that rising trade barriers could bring problems to the U.K. economy, which has relied significantly on exports over the last few decades. Higher duties could lead to less demand for U.K. products, ultimately restricting the economy.

"The U.K.’s a very globalized economy, large exporter, and also large foreign direct investment in the U.K. And so swings in global growth have a big effect on the U.K. If you were to get a retreat from freer global trade that also could affect the U.K. growth outlook," Saunders told CNBC.

However, he pointed out that, to date, the data has been positive and there are yet no signs that rising tensions in global trade have dented the U.K. economy.

"So far, in the surveys of export orders, it looks as if what we’ve seen externally is not significantly, not having a major effect, on U.K. export growth. But clearly it’s a thing which we are keeping a close eye on."