"If we overdo the stimulus somewhat and then find the economy recovers strongly, we have ample tools and time to tighten policy again "
In a speech released today, Saunders said that a weaker recovery would be "especially damaging" due to low inflation and long-term costs from "scarring on potential growth".
Turning to the MPC's view on monetary policy, he said "risk management considerations favour a relatively prompt and aggressive response to downside risks".
Saunders explained: "It is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low inflation rut with increased hysteresis costs."
The MPC has eased monetary policy markedly in recent months, cutting Bank Rate to a record low of 0.1%.
Saunders said that some recovery in activity is likely over time as the extent of social distancing eases. However he said his 'top concern' is that "risks lie on the side of a relatively slow recovery, reflecting persistently high levels of uncertainty".
Even as the lockdown eases, Saundesr said households and businesses will still face "considerable uncertainty" due to fear of further job losses or business failures, and the possibility of a renewed escalation of the Covid outbreak that requires some lockdown measures to be reimposed.
He added that "for some time to come, many firms will not be able to plan ahead with much confidence".
Saunders reiterate that the "prospects for the economy are tilted more on the side of a slower recovery" and said that Covid-19 has put further downward pressure on interest rates, "such that the need to take account of the limited extent of monetary policy space is even more pressing".
Saunders expanded: "At present, if we overdo the stimulus somewhat and then find the economy recovers strongly, we have ample tools and time to tighten policy again before persistent excess demand and inflation become a problem. Conversely, if we provide too little stimulus, the economy could slip into a lowflation trap that is much harder to escape, with greater long-term costs from business failures and high unemployment."
He concluded: "Policy should react in an asymmetric fashion – if tightening is needed, it should be gradual; if easing is needed, it should occur promptly.
"It is better to err on the side of somewhat too much stimulus rather than too little."
