(Bloomberg) -- It’s safer for the Bank of England to ease too much rather than too little as it responds to the coronavirus pandemic, according to policy maker Michael Saunders.
The U.K. is at risk of a relatively slow recovery from the crisis, which could prove especially damaging, Saunders said on a webinar Thursday. Failing to add more stimulus now could see the economy slip into a “lowflation trap.”
“The costs of policy error are, to an extent, asymmetric at present,” he said. “It is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low-inflation rut.”
The pound slid after the comments, dropping 0.2% to $1,2241. Meanwhile, money markets moved to price in a 10 basis-point interest-rate cut for May 2021. That would take the key rate to zero.
Saunders was one of the two dissenters that called for an immediate expansion of asset purchases at the Monetary Policy Committee’s May 7 meeting, while the majority said there was value in waiting for more information on how the lockdown will be relaxed. Economists surveyed by Bloomberg anticipate an increase in the plan in June.
The comments on the outlook echo those made by Governor Andrew Bailey, who said Wednesday the U.K. faces a protracted recovery from the coronavirus crisis and policy makers stand ready to add more stimulus.
That view appear more downbeat than a scenario published by the central bank earlier this month which foresaw a relatively rapid bounceback from the initial hit of the virus.
The speech is Saunders’ first since Covid-19 hit the U.K., prompting the central banks to slash interest rates to a record low 0.1%, expand bond buying and step in to boost capital.
(Updates with market reaction in fourth paragraph)
©2020 Bloomberg L.P.
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