"Both the recent UK data and the outlook leave me alert to the possible need for a more activist, more rapid withdrawal of monetary policy restrictiveness in the next couple of years."
- Alan Taylor
Alan Taylor, member of the Bank of England's Monetary Policy Committee, says the UK has "made it to the last half mile on inflation" and that "it’s time to get interest rates back toward normal".
Taylor voted to reduce Bank Rate by 0.25% to 4.50% at the MPC's last meeting.
In his speech, given yesterday at Leeds University Business School, Taylor sets out three 'cases' describing the possible dynamics of the UK economy and inflation persistence.
In case 1, the economy is viewed as having suffered a large external inflation shock; but although large, the economy is adjusting back to a normal steady state at the usual speed. In this case, he says, no unusual deviation of policy action is needed to get inflation to target in a timely manner. In the long run, there has been no structural change to the economy and the policy rate returns to its former neutral level.
Taylor says the central view is of a "gradual” pace of interest rate cuts of one per quarter, or 100 basis points by December 2025.
However, he believes that the probability of case 1 is rising and "we could then need a more accelerated pace of rate cuts, perhaps 125 or 150 basis points in the coming year."
Taylor added that "both the recent UK data and the outlook leave me alert to the possible need for a more activist, more rapid withdrawal of monetary policy restrictiveness in the next couple of years".
He noted that the "restrictive stance of monetary policy... has weighed on UK businesses and households in 2024 and it will still add further pressure in 2025 to the cashflow squeeze in the near term".
He says any business trying to finance new investment after a pause during the pandemic years now faces a tougher interest-rate environment and, among households, 50% of mortgage accounts are expected to see an increase in payments by the end of 2027
As a result, Taylor says "I think it makes sense to cut rates pre-emptively".
Industry experts believe November's return to GDP growth, coupled with yesterday's falling inflation figure, could prompt the Bank of England to cut rates at next month's meeting.
