MPC member Alan Taylor joins a chorus of rate-setters signalling a base interest rate hold
A growing number of Bank of England policymakers have signalled that interest rates are unlikely to rise in the near term, even as the Iran war continues to push inflation higher.
The latest to speak out is Monetary Policy Committee (MPC) member Alan Taylor, who said rates at their current level are already acting as a restraint on the economy and that he sees no case for tightening further.
Speaking in an interview broadcast by Sky News on Monday, the rate-setter indicated he was broadly content with the existing rate setting, short of a severe deterioration in conditions.
"I feel comfortable where we are unless we get the worst-case scenario," Taylor (pictured right) said. "But I really want to get that sense that this is moving behind us."
Prior to the outbreak of the US and Israeli conflict with Iran, Taylor had been among the most vocal proponents of rate reductions on the MPC. Since the conflict began, he and the majority of committee members have voted to hold borrowing costs at their current level. The MPC held Bank Rate at 3.75% at its most recent meeting.
Taylor's remarks are consistent with recent guidance from the Bank's most senior figures. Governor Andrew Bailey, speaking at the Reykjavik Economic Conference in late May, said the MPC had already effectively tightened monetary conditions by removing market expectations for rate cuts, and that the central bank was prepared to tolerate a period of above-target inflation rather than risk further damage to an economy already feeling the strain of higher energy costs, weaker consumer spending and a softening labour market.
"Given the context of softness in the real economy and uncertainty around the scale and duration of the shock, tolerating temporarily above target inflation to provide some support for the real economy is an appropriate way to approach the trade-off," Bailey said. "But that tolerance would weaken if signs of second-round effects begin to emerge."
Bailey also acknowledged the limits of monetary policy in responding to an energy-driven shock. "Monetary policy generally looks through the direct effects of energy prices on inflation," he said, warning that attempting to offset them directly would produce "undesirable volatility in both inflation and activity."
Before hostilities broke out in late February, UK inflation had been on track to return to around the 2% target from April. Instead, the April reading came in at 2.8%, with Bailey warning that prices are "likely to go higher" as utility bills continue to rise and firms pass energy costs through their supply chains.
Deputy governor Sarah Breeden had also earlier signalled that the Bank was in no rush to move. Speaking to the Financial Times in May, she said that while a rate increase could not be delayed indefinitely, there was no urgency to act at either of the next two scheduled meetings. "You're obviously correct that we can't wait forever, but we don't need to do it in June or July," she said.
Breeden also played down the risk of the Iran conflict producing the kind of prolonged inflationary spiral seen following Russia's invasion of Ukraine in 2022, saying it was far less likely that the current hostilities would generate second-round effects on a comparable scale.
MPC member Megan Greene has taken a more cautious position, warning that inflation risks were "entirely on the upside" while still declining to vote for an immediate rate rise at the April meeting, when the committee voted 8-1 to hold borrowing costs.
"It's worth waiting for a little while to see what happens with the progression of this war, and therefore see what we can infer about how it will propagate through the economy before we make a move," she said. "We've now had a negative supply shock, an energy shock, and that stands to push inflation up and growth down, which is a terrible situation for a central banker to be in."
Greene acknowledged there were "already some signs of some persistence from previous shocks left in the economy" before the conflict began, and said the risk to energy prices and to second-round inflationary effects was skewed to the upside.
Despite the broadly dovish tone from Bailey, Breeden, and Taylor, analysis by ING cautions that a July rate rise cannot be entirely dismissed. The bank said a prolonged blockade of the Strait of Hormuz could yet force policymakers to act, despite falling spot energy prices and weakening wage growth having reduced the immediate pressure to tighten.
"Back then, we thought a June hike had become marginally more likely than not," said James Smith, developed markets economist at ING. "That's no longer the case. Markets are right that the odds of a hike this month have faded."
ING also flagged that not all MPC members share the more cautious approach. "BoE members Megan Greene and potentially Catherine Mann look likely to join Huw Pill in advocating for higher interest rates, even if Governor Andrew Bailey appears much less convinced," Smith said.
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