Three more interest rate cuts could come, Bank of England official says
The Bank of England could make three more interest rate cuts in order to reach its neutral level as inflation drops back to two per cent over the coming year, a Monetary Policy Committee member has suggested.
Alan Taylor, an external member who has consistently voted for larger interest rate cuts over the past year and a half, said higher unemployment and lower wage growth could drive the Bank to cut interest rates three more times.
He said the jobs market was “converging on a pessimistic outlook” while weak productivity growth could flatten the UK economy, with lower interest rates helping to give it a boost.
“I have become more reassured that we are proceeding towards inflation normalisation at a reasonable pace,” Taylor said.
“The risks are shifting to lower inflation and higher unemployment.
“We might have two or three rate cuts to go before the theoretical neutral level.”
Taylor also suggested that there was an additional risk of inflation dropping below the Bank’s target two per cent rate.
Interest rate cuts hinge on job market decline
The Office for National Statistics (ONS) revealed last week that inflation eased to three per cent in the year to January compared to 3.4 per cent the month before.
Lower prices for petrol, bread and airfares contributed to the drop though Taylor admitted there were some risks around sticky services inflation, an economic indicator which is closely watched by Bank policymakers.
Taylor batted away questions about whether unemployment would remain structurally high and whether the Bank needed to make monetary policy more accommodative to ease the risks of a recession.
In a decision last year, Taylor flagged the risk of a recession in the UK economy as a key reason for cutting interest rates at a faster rate preferred by the majority of MPC members.
Other Bank members including governor Andrew Bailey, chief economist Huw Pill and external member Megan Greene are set to appear before the Treasury Committee on Tuesday afternoon to discuss February’s monetary policy report.
‘High tariff regime’
Policymakers are expected to be questioned on the pace of interest rate cuts as well as on the effects of Trump’s new tariff announcements after the US administration lost a Supreme Court ruling on emergency rates.
Taylor told an audience of bankers and City analysts that they could look past the new flat 14 per cent tariff rate, which could disproportionately hit UK businesses, and rather see that higher tariff rates across the board would be here to stay.
“We’ve moved to the US having a high tariff regime,” Taylor said.
“If you calculate the new average tariff, it’s moved a bit but the overall tariff has not changed much.”
“We should expect this shock to play out over many years.”
The government is scrambling to protect a trade deal struck with the US in May last year securing lower tariffs for carmakers and pharmaceuticals.
A No 10 spokesman said on Monday that talks with Trump officials were continuing and that they were working to find out how a new flat tariff rate would hit UK businesses.
He added “everything was on the table” when asked whether reciprocal tariffs were being considered.