BoE’s Saunders says economy might have more spare capacity than thought

LONDON (Reuters) – Bank of England policymaker Michael Saunders said on Friday there might be more spare capacity – potentially meaning less inflation pressure – in Britain’s economy after its COVID crash than the central bank said last month.

“The pandemic and associated restrictions have significantly reduced potential output over recent quarters, but the majority of these effects are likely to be fairly temporary,” Saunders said in a speech.

“I put more weight on the risk that the central forecast in the February MPR (Monetary Policy Report) overstated the temporary drop in potential output over the last year (and hence understated the extent of spare capacity in the economy at present) and was overly pessimistic on the path for potential output in the year ahead.”

Saunders said the unemployment rate would be a good future benchmark in judging the extent to which the output gap is closing.