"I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2% target."
During an online webinar, he said: "Looking forward, I suspect that risks lie on the side of a slower recovery over the next year or two and a longer period of excess supply than the forecast in the August MPR. If these risks develop, then some further monetary loosening may be needed in order to support the economy and prevent a persistent undershoot of the 2% inflation target."
Saunders predicts that unemployment will "rise significantly" in coming quarters as the furlough scheme winds down and workforce participation recovers.
He said that since the outbreak of Covid-19, the economy has been supported by an "exceptional level of fiscal and monetary policy support", stating that the government support measures "turned out to be more powerful than expected in supporting household incomes and spending".
Looking ahead, Saunders said that the outlook for the economy will depend in large part on dynamics of the pandemic, the extent of progress in vaccines and other treatments, and the reaction of households, businesses and governments to those developments.
He said: "The uncertainties in the outlook are unusually high at present. My own view is that... risks are on the side of a slower recovery over the next year or two."
Explaining, Saunders said that a range of scenarios for Covid-19 are conceivable, and that as lockdowns ease and economic activity recovers, infection rates tend to rise again.
He continued: "A lingering or persistent Covid scenario might not produce a renewed national lockdown. But it could well result in a long period of rolling local lockdowns of varying sizes... Unlike the national lockdown, local lockdowns have not so far been cushioned by large additional fiscal support. There is no local version of the furlough scheme, Bounce Back Loans, or tax deferrals. Households and companies will bear the economic costs of local lockdowns to a much greater extent than for the national lockdown. The desire to self-insure against lockdown risk would probably create widespread caution and a desire for higher savings among households and businesses."
Saunders concluded by predicting that risks lie on the side of "weaker growth and a longer period of excess supply", and hence a more persistent inflation undershoot.
He added: "With relatively limited monetary policy space, it would be harder to return inflation to target from below than from above. I consider it quite likely that additional monetary easing will be appropriate in order to achieve a sustained return of inflation to the 2% target."
