Bank of England policymaker Michael Saunders has warned that it is better for the central bank to risk injecting too much stimulus into the economy rather than too little and face the risk of serious economic damage.
Saunders, a member of the Bank’s monetary policy committee (MPC), was one of just two of the nine-strong panel to vote for an increase in the stimulus programme earlier this month.
Speaking in a webinar he warned that banks could potentially become wary of lending to businesses who in turn could pull back from making investment decisions.
He said: “The more that uncertainty and caution weigh on spending, the greater the likely extent of persistent scarring on potential GDP through high unemployment and business failures.
“In turn, the greater the loss of potential GDP, the greater the likelihood that consumers and businesses downgrade expectations
for future income gains and hence cut spending.
“If unchecked, there are risks of a vicious circle, whereby the economy gets stuck in a self-feeding loop of weak activity, pessimistic expectations and low investment.”
The proposal which the MPC voted against earlier this month would have seen a £100bn increase in the BoE’s stimulus package from £645bn to £745bn.