BOE’s Michael Saunders desires more activism

In August 2013 when Mark Carney had just become Governor, the enterprising economist, then at Citigroup, was so keen to quiz him that he paid £10 to join the Nottingham Chamber of Commerce so he could get into the Canadian’s first public event, and hopped on a train.

Carney met his question with a raised eyebrow (“Have you moved up here, Michael?”) before stonewalling his eager inquisitor.

These days Saunders, who laughingly describes himself as a “part-time” member of the Nottingham chamber, finds it a lot easier to get close to the Governor.

For the past year, he’s sat around the table pulling the levers which decide mortgages and savings rates as one of the committee’s four external members.

And he’s not the “newbie” any more: the 53-year-old has just made himself at home in departed Kristin Forbes’s spacious wood-panelled corner office, complete with Hogarth prints and an antique barometer, leaving his former, smaller, berth to new member Silvana Tenreyro.

It may be one member, one vote on the MPC, but there’s obviously a pecking order when it comes to the offices.

Saunders, who grew up in Oxford but settled in south-east London 25 years ago, was first drawn to economics in the financial turmoil of the Seventies.

“I didn’t know if I wanted to be an economist but I was interested in economics. I was a teenager in the Seventies. The world back then… was a world of inflation, currency crisis, the IMF crisis, unemployment surging. It seemed to me that a lot of what was going on in the world was to do with economics.”

One of the first books he read on the subject was Free to Choose, Milton Friedman’s seminal paean to free markets; while he was at the London School of Economics, he used to listen to a young Mervyn King’s lectures.

After graduating, he had a two-year stint at the Institute for Fiscal Studies before heading into investment banking.

Despite his 26 years at Citigroup, the bespectacled Saunders isn’t a rip-roaring investment banker type and has a softly-spoken, academic mien. (“He was always a very serious chap and very clever,” says one contemporary.)

He had long harboured ambitions to work in Threadneedle Street, even though he surprised himself by geting onto the MPC at the first attempt.

Saunders held fire in the early aftermath of the Brexit vote, but joined the now-departed Forbes and Ian McCafferty in voting for a rate hike in June.

In the latest meeting he and McCafferty were outvoted 6-2. Broadly, Saunders is slightly more bullish about the economy than the majority and more worried about above-target inflation, due to stay above the Bank’s 2% target for the next two to three years.

With the jobless rate at a 40-year low he also frets that there is less economic “slack” to use up before wages and inflation push higher.

That means the Bank might have to be a “bit more activist”, as he puts it: “The test will come going forward. The amount of spare capacity is much less now than in the past few years. So it follows from that it would be normal for the response of policy, if growth surprises on the upside, to be a bit more activist than it has been in the past few years.”

That was the thrust of the Bank’s latest inflation report, which warned rates could have to rise faster than markets are betting, if the economy plays out as it predicts (by no means a certainty, given the Old Lady’s recent forecasting history).

The other gloomy message was that Brexit is beginning to affect the economy’s long-run growth potential, hit by the impact of low investment.

Saunders told Institutional Investor Magazine in February 2016 that “the consequences of exit, I think, are highly damaging for the economy. The options range from bad to awful.”

Given that dire prognosis, why is he voting for a rate rise? Now at the Bank, his language is rather less free-wheeling.

He reconciles the positions, arguing that you have to separate the long-run damage estimated by the likes of the IMF and the OECD from the near term.

He says Brexit “probably means the economy will grow several percentage points less than it otherwise would do”.

He adds: “Maybe it might grow five percentage points less over the next 15 years. That’s a fairly sizeable economic loss if that’s the case. But that’s over a long period of time.

“Setting monetary policy, we’re not trying to determine the outlook for growth over the next 15 years, we’re thinking about the next couple of years and I doubt if those long-run effects of Brexit come through immediately.”

Besides, there’s little rate-setters can do about the long-term hit from lower foreign and domestic investment and potentially a smaller workforce, he argues.

“It’s not something that monetary policy can prevent from happening.” It means there’s less room for the UK to grow before you need rate rises to curb inflation.

Saunders will be watching the jobs market, since 90% of the growth there in the past two years has come from workers born outside the UK.

There are hints (“I don’t think you can go any stronger than that”) that fewer EU nationals are coming here.

One of the puzzles of recent years has been low wage growth, but as Saunders points out, “the argument is basically if firms can hire large amounts of EU nationals at will, there’s almost no level of UK jobless rate which puts significant upward pressure on pay, because there’s this large pool of available labour… across other EU countries”.

If there are fewer workers, due to post-Brexit restrictions potentially, “you can see the labour market ends up getting tighter”. Again, that means a firmer push on the economy’s brakes.

The Bank hopes for a “smooth transition” but the response to a turbulent Brexit could go either way.

“Let’s just say the Brexit process is bumpy and business and consumer confidence suffers, and that might at first point to downside risks to growth. But if at the same time sterling falls, and the pound has been quite sensitive to Brexit, that might give some support to growth through exports, as well as pushing inflation up. How policy responds depends on all of that.”

What will make this hawk put his claws away, particularly after weak recent growth?

He’s paying close attention to the various monthly business surveys, which he thinks show a growth pace of “about 2%”.

“What it would take to persuade me were signs across a range of business surveys that the economy is slowing sharply… My guess, my hunch, is that growth will be OK and the jobless rate will continue to fall, and that’s what motivated my view on rates.”

He also seems less concerned over households tightening belts. “So far the consumer side is slowing, clearly, but it is more or less balanced with the improvement elsewhere [in investment and trade].

“Consumers have cut back a bit, but for me, the risk that they cut back really sharply… that risk so far hasn’t materialised.”

If he can’t persuade the MPC to his point of view, maybe he can settle it on the tennis court; the keen player has already sounded out some of his fellow rate-setters for a match-up and there are “one or two possibles”, he adds.

Saunders, who is married with two university-age children, clearly loves his job and says it’s a “privilege” to work at the Bank.

He seems so keen that I ask if he might follow the path of Ben Broadbent, who became deputy Governor for monetary policy after first joining the MPC as an external member.

If Broadbent gets the top job in 2019 when Carney goes, Saunders might be a good bet to fill his shoes.

The economist says: “That’s way off in the future. I enjoy what I’m doing at the moment. My term’s got another couple of years. Anything beyond that is way off in the distance for now.”

The politician’s answer suggests he might be around Threadneedle Street for a few more years yet.


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