MNI INTERVIEW: BOE Can Look Through Starmer's Woes - Saunders

Only a large move in sterling or gilts in reaction to a change in the UK’s political leadership would affect Bank of England policy, former BOE Monetary Policy Committee member Michael Saunders told MNI, playing down speculation that uncertainty over the future of Prime Minister Keir Starmer would necessarily hit business and consumer confidence.

"It's not like Starmer is popular, is he? So a new leader may lift confidence or lower it. It could go either way," Saunders said, adding that any change in fiscal policy and market expectations of that policy will instead be key for the BOE, which is currently signalling another cut in Bank Rate before the end of its easing cycle.

The government's plans have backloaded fiscal tightening towards the next election and Saunders said a more popular leader than Starmer may even be better, not worse, placed to deliver it.

"I think fiscal slippage is likely under any likely Labour leader. But it's not inevitable that the risk is greater under a non-Starmer leader than under Starmer," Saunders said. (See MNI INTERVIEW: UK Fiscal Gap Needs Simple Tax Hikes - King)

"Just for the sake of argument, if Labour elects a new leader, and said leader is highly popular, then backloaded fiscal tightening might be less unbelievable. The expected scale of fiscal slippage might be smaller," he said.

LARGE MARKET MOVES

"If you're on the MPC you'd just say, I'll let the pound and gilts tell me whether any of this matters," he said, though he pushed back against the view that policymakers should look to offset any sharp rise in gilt yields by cutting the policy rate, adding that the reason for any such move would be key.

"You've got to look at what is driving a rise of gilt yields. If it's due to fiscal loosening, then you've got to account for the greater expected stimulus from that ... I think most MPC members would view it in the way that I've described, rather than treat it as an exogenous shock," he said.

If alternative candidates for the Labour leadership express similar fiscal plans, then markets should not be too volatile, Saunders said.

 “The MPC might also essentially just carry on as they were and say, we'll respond to changes in the data," he said. "Presumably the pound and gilts are trying to price in the probabilities of different outcomes and move about more as those probabilities shift. And then the MPC would have more reason to sit back and wait and just see how things settle down.” (MNI INTERVIEW: Labour Market Weakness May Tame UK Inflation)

When asked about the scale of a move that could prompt the MPC to delay any future cuts, Saunders said that "it's hard to be precise. Several percent off the trade-weighted or 50 basis points on gilt yields might give the MPC a reason to pause."

FISCAL RULES

"I think any of the leaders would broadly keep the current fiscal rules. That's because the risk of looking like [former Prime Minister] Liz Truss is too great if you abandon the fiscal rules," he said. (See MNI INTERVIEW: UK Debt Stabilisation Insufficient - NIESR Head)

One wrinkle, raised by potential leadership candidate Andy Burnham, is to give public corporations greater freedom to borrow by excluding their debt from the official debt rule calculation. Such a move would be consistent, Saunders noted, with his proposed nationalisation of utilities. 

"If he's going to bring utilities into the public sector, the logical thing would be to exclude their borrowing from the deficit rules. Otherwise the idea that they could fund higher investment gets short circuited."