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BoE's Saunders Says Too Little Stimulus To Push Economy Into 'Lowflation Trap'

Bank of England policymaker Michael Saunders said the UK economy could slip into a ‘lowflation trap’ in case of too little stimulus.

“If we overdo the stimulus somewhat and then find the economy recovers strongly, we have ample tools and time to tighten policy again before persistent excess demand and inflation become a problem,” Saunders said in a webinar on Thursday.

However, a ‘lowflation trap’ caused by too little stimulus will be much harder to escape, with greater long-term costs from business failures and high unemployment, Saunders noted.

“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 rather than ease too little.

At the May monetary policy meeting, Saunders and Jonathan Haskel sought an increase in asset purchase programme.

Further, Saunders said risks lie on the side of a relatively slow recovery for the UK after the coronavirus pandemic.

He observed that a relatively slow recovery would be costly, not just in terms of leaving inflation below target and the economy operating with spare capacity for a longer period, but also because it would increase the long term costs to the economy from hysteresis and scarring.

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