Written by William Schomberg, David Milliken

LONDON (Reuters), -Bank of England policymaker Michael Saunders claimed that Russia’s invasion of Ukraine would likely drive Britain’s soaring inflation higher. However, it’s too soon to know the effects on monetary policy.

Saunders, who spoke to University of East Anglia students on Tuesday after a speech about inflation’s peak in March, said that higher inflation would lead to lower incomes and more spending.

When asked about the invasion, he stated that it was not yet clear if recent developments would have an impact on inflation in two or three years.

“I would not want to draw at this stage on whether there are any implications for monetary policy from this.”

Responding to the increased tensions following the invasion, investors cut back on Tuesday on their wagers for a 25 basis-point Bank Rate increase on March 17th, after the next MPC meeting.

Although yields fell on 2-year British bonds, they still projected a 95% chance of an increase in that magnitude, even though there was a dip in yields on British government bonds. These are vulnerable to speculation regarding BoE rate changes and other maturities.

Saunders along with three others from the Monetary Policy Committee voted to raise the Bank Rate to 0.755% last month. This was to keep the current spike in inflation, which reached a 30-year-high of 5.5% in Jan, from growing into a more serious problem.

A five-strong majority of the MPC supported a 25-basis-point increase to 0.50%.

Saunders stated Tuesday that he prefers to “move quite quickly toward a more neutral position” in order to eliminate the risk of rising inflation expectations. This will also help prevent higher pay growth becoming more deeply embedded.

However, he said that he will not vote again for a rate increase of 50 basis points in future despite the risk of more severe and persistent inflation pressures than those predicted by BoE last month.

He stated that he did not support a rate increase of 50bp at the February meeting, but that it does not mean that he would vote for further increases.

Saunders claimed that while energy prices may have accounted for some of the current inflation overshoots, there is “significant excess supply” and expectations about the future are “not as solidly anchored.”

His support of a rate increase by 50 basis points last month does not mean that Bank Rate will have to go higher than the 1.5% market-based yield curve peak.

“All things being equal, I believe that prompt tightening right now can help to limit the amount of tightening needed to get inflation back on target,” he stated.

Catherine Mann, a MPC fellow member, voted in favor of a 50-basis-point rise last month. The BoE must ensure that this current spike in energy prices doesn’t impact long-term pricing decisions for businesses, according to Mann.