BoE's Saunders says he's worried inflation will be higher than forecasts

© Reuters. FILE PHOTO: A general view shows the Bank of England and the and the Royal Exchange Building in London, Britain, December 17, 2020. REUTERS/Hannah McKay

LONDON (Reuters) - Bank of England policymaker Michael Saunders, who last week backed a bigger interest rate rise than most of his colleagues, said he was worried that inflation exceed BoE's forecasts which see it topping 10% later this year.

"I put considerable weight on risks that, unless checked by monetary policy, domestic capacity and inflation pressures would probably be greater and more persistent than the central forecast," he said in a speech at the Resolution Foundation think tank.

"As a result, my preference has been to move relatively quickly to a more neutral monetary policy stance."

Saunders and two other members of the BoE's nine-strong Monetary Policy Committee voted to raise Bank Rate from 0.75% to 1.25% at their May meeting. But a majority of six members backed a smaller rise to 1.0%.

Saunders said in his speech on Monday that inflation and key measures of longer-term inflation expectations were uncomfortably high and were feeding into underlying pay growth and services inflation.

"The strength of external costs is eroding real incomes and is likely to cap real spending," he said.

"But, by creating a long period of above-target inflation, these external cost increases also may exacerbate the rise in inflation expectations and hence, with the tight labour market, could make it harder to ensure domestic inflation pressures return to a target-consistent pace."

Saunders warned that the BoE's credibility could not be taken for granted.

Britain's consumer prices rose by 7.0% in the 12 months to March - a 30-year high - and the BoE said last week that inflation was likely to peak at more than 10% later this year, causing a sharp economic slowdown or possibly a recession.

Saunders said the BoE should "lean strongly" against high inflation expectations because "the process of re-anchoring price expectations could be very costly in economic terms".