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Former BOE Policymaker Says UK’s Most Painful Period Is Still AheadFormer BOE Policymaker Says UK’s Most Painful Period Is Still Ahead - BLOOMBERG

MAY 31, 2023

(Bloomberg) -- Former Bank of England policymaker Michael Saunders said the UK economy is headed for a more painful period after the quickest succession of interest rate rises in four decades takes hold. 

“It normally takes about a year for the peak effects from changes in interest rates,” Saunders in Bloomberg’s UK Politics podcast. “We haven’t yet felt much of the effect of the big rises in rates. That pain will come through, and it’ll come through in the next few quarters.”

Saunders was among the most hawkish of the BOE’s nine Monetary Policy Committee members until he left the panel in August 2022. Currently, he serves as a senior economic adviser at Oxford Economics.

The comments add to concerns about whether soaring property prices will be affordable for households feeling strains on their budget from inflation, rising interest rates and falling real wages. Saunders and the BOE have both pointed out that most of the mortgages held in the UK are on fixed-rates that will cost more when borrowers are required to refinance.

More than 1.4 million fixed-rate borrowers will see their mortgages rise this year, according to an Office for National Statistics analysis of Bank of England data. This will reduce the spending power of Britons whose pay is eaten away by inflation whom, Saunders said. 

“The monetary transmission mechanism and the way in which rising interest rates cool the economy still works, but it may take longer than previously,” said Saunders. “The pain comes through perhaps more slowly. But when it hits people with high mortgage payments, it’s much more concentrated than it used to be.”

In July, BOE Deputy Governor Jon Cunliffe said mortgage borrowers and companies would run into debt distress if rates hit 5%. But markets upped their bets on what the central bank’s peak interest rate would be last week after the Consumer Prices Index reading for April came in at 8.7% — a half point higher than economists had expected.


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