Bank of England policymaker Alan Taylor said on Thursday that further interest rate increases would be hard to justify except under a worst-case scenario linked to Iran, and that the present policy rate of 3.75% is restrictive enough to bring inflation under control.
Taylor, regarded as one of the more dovish voices on the Monetary Policy Committee, said it remains appropriate to keep rates on hold for an extended period as the United Kingdom faces elevated recession risks arising from the Middle East conflict. He emphasised the need for caution rather than moving prematurely on policy.
Pointing to the domestic data, Taylor highlighted a number of signs of economic weakness. Private sector activity is contracting, inflation readings are softening, and the jobs market is losing momentum - developments he says are helping to avert a repeat of the inflationary surge seen in 2022.
On the stance of policy, Taylor noted that the current 3.75% rate sits 100 basis points above what he identifies as a 3% neutral rate. He said that, while he had previously supported quicker cuts to interest rates before energy prices climbed, recent developments have led him to prefer a cautious, wait-and-see posture rather than reacting forcefully to incoming information.
Taylor also addressed the Bank's downside risk scenario - a path in which inflation could rise to 6.2% by 2027. He described those risks as far from certain, downplaying the likelihood that the worst-case projection will materialise.
Summary of Taylor's position:
- Rate hikes would be justified only in a worst-case Iran scenario.
- 3.75% is considered restrictive and sufficient to control inflation in current conditions.
- Given weakening activity and a softer labour market, an extended pause in rates is appropriate.
The remarks underscore a preference among some policymakers for a cautious approach to monetary easing and tightening, balancing the risk of higher inflation against signs of slowing demand and employment conditions.