The Bank of England (BoE) should act promptly to reduce interest rates to counter signs of a weakening British economy, according to Alan Taylor, the institution’s newest Monetary Policy Committee (MPC) member.
Speaking at Leeds University on Wednesday, Taylor emphasized the need for pre-emptive measures to support a soft landing for the economy as inflation pressures ease.
An economics professor, Taylor had already voted for rate cuts in November and December.
In November, the BoE lowered its benchmark interest rate to 4.75%, but the December meeting saw most of the MPC opting to steady rates.
Taylor, however, remains convinced that further reductions are necessary.
“We are in the last half-mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing,” Taylor said, emphasizing the importance of adjusting monetary policy to shifting economic conditions.
UK inflation eases, but risks remain
Recent data supports Taylor’s stance, showing Britain’s headline inflation rate fell to 2.5% in December from 2.6% in November.
Core inflation, closely monitored by the BoE, also declined faster than expected.
However, Taylor warned that while inflation risks have diminished, the potential for an economic downturn has increased, making it crucial to take preventive action.
“Right now, I think it makes sense to cut rates pre-emptively to take out a little insurance against this change in the balance of risks, given that our policy rate is still far above neutral and would remain very restrictive,” he said.
Gradual policy shifts
The BoE has already reduced interest rates twice since August, but its approach has been more cautious compared to other central banks, given the persistent inflationary pressures earlier in the year.
Taylor argued that the inflation outlook for 2024 has improved, with price growth slowing faster than anticipated.
Sterling reacted negatively to the publication of Taylor’s speech, weakening by about a third of a cent against the dollar.
This market movement reflects the heightened sensitivity to signals of further monetary easing.
Taylor’s comments highlight a growing division within the MPC about the future path of interest rates. While some members advocate caution to ensure inflation is fully under control, Taylor and others believe the focus should now shift to supporting economic growth.
With inflation nearing target levels and economic risks mounting, Taylor’s push for rate cuts signals a potential pivot in the BoE’s monetary policy strategy, aiming to strike a balance between stability and growth.
The post Alan Taylor urges BoE to cut interest rates in response to signs of a weakening UK economy appeared first on Invezz
