BoE's Saunders says would not be surprised if sterling fell further

LONDON (Reuters) - Bank of England policymaker Michael Saunders said on Tuesday he would not be surprised if the pound fell further, but the BoE could overlook the effect of weak sterling on inflation, possibly for years.

Sterling slid below $1.23 on Tuesday, in line with forecasts from some major banks, but last week’s shock 10-minute plunge to a 31-year low has some wondering if a drop closer to parity is possible. [GBP/POLL]

“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,” Saunders told lawmakers in a written submission.

Britain’s current account deficit stands at about 6 percent of gross domestic product - one of the largest in the developed world. The BoE has said sterling’s fall since June’s Brexit vote should help to reduce it.

Saunders voted to keep interest rates unchanged at a record-low 0.25 percent last month, in his first Monetary Policy Committee meeting since joining the BoE from U.S. bank Citi, where he worked as its chief UK economist.

Another new BoE policymaker - University of Chicago academic Anil Kashyap, who has just joined the Financial Policy Committee - told lawmakers on Tuesday that sterling could weaken further if Britain suffers a “hard Brexit”, where it loses its preferential trading terms with the European Union.

Kashyap said Britain would not need to lose many financial services jobs to knock a hole in its government finances, something that could further damage the pound’s value.

Sterling extended losses while Saunders and Kashyap spoke, leaving it 0.8 percent down on the day as the dollar rose broadly.

Saunders said a “bumpy” process of leaving the EU that leaves Britain with a bad deal could result in much lower potential economic growth than recent trends suggest.

“If such a scenario were to materialise then, provided inflation expectations and pay growth remain well-contained, I would expect the MPC (Monetary Policy Committee) to largely look through any such direct effects on inflation of sterling weakness, even if they extend for several years,” he said.

Saunders also said it was possible that leaving the EU could lead to faster wage growth and inflation for a given level of unemployment, due to the reduced availability of foreign workers.

But he said he did not see signs wages were picking up yet, and that in recent years downward pressure on wages had dominated.

There was still plenty of scope for the BoE to stimulate the economy further if necessary, Saunders said.

“I think we’re still able to achieve our remit. And I think it’s fair to say monetary policy is burdened. I don’t think I would yet say it is overburdened,” he said.

He repeated his view that Britain’s economy is likely to fare better over the next year than most economists expect, although he thought it was likely that Brexit would result in slightly lower potential economic growth in the long-run.

Writing by Andy Bruce,; editing by William Schomberg and Angus MacSwan