Cuts to interest rates could resume if energy prices ease, MPC member says

Alan Taylor, member of the Bank of England's Monetary Policy Committee, says an extended hold to interest rates is "very much the correct and appropriately measured policy response".

During a speech in London this week, Taylor noted that in the second half of this year, less volatile energy prices combined with recent inflation coming in below expectations, have led the Bank to lower its forecasts for inflation. The Bank now expects inflation to peak at 3.25% later this year, 0.5pp lower than in its April projection.

Discussing the ongoing war in West Asia, Taylor said: "Right now, we are hit by yet another exogenous energy shock, but this time we find ourselves in a weak economy and in an already restrictive policy stance".

He believes a "benign outcome for energy prices by next year is now more likely", and if that 'benign scenario' plays out "interest rates can and should resume their downward path to neutral".

Taylor added: "The pre-war weak domestic economic backdrop remains. If even more slack then opens up... and if inflation looks to undershoot, we may end up having to cut quickly and could even see Bank Rate below neutral for a while."

In conclusion, he noted: "Until we have greater certainty, then, an extended hold at this level is, to me, very much the correct and appropriately measured policy response we need, given the balance of risks.

"Geopolitics is now driving economic outcomes, and hence monetary policy. It is a very uncomfortable and unwelcome place to be, but the reality we must face."

The Bank of England's Monetary Policy Committee voted 7-2 to hold Bank Rate at 3.75% at its latest meeting amid ongoing political and economic uncertainty. Two members voted to increase Bank Rate by 0.25 percentage points, to 4%, including Megan Greene.

Taylor's comments are in contrast to Greene, who earlier this month said she sees a growing case for increases to Bank Rate, stating that "a more proactive approach may be needed to lean against inflation when an economy has been hit by successive supply shocks."