MPC member sees 'high bar to hiking' interest rates

Alan Taylor, member of the Bank of England's Monetary Policy Committee, says he currently sees a "high bar to hiking" interest rates in response to the conflict in West Asia.

While the world economy faces a new supply shock in the Persian Gulf, Taylor says the UK economy’s starting point is very different from past energy shocks. 

Before the Iran war inflation was returning to the Bank's 2% target, supporting the case for rate cuts.

UK CPI inflation came in at 3% in February, the same as January's figure of 3%. However, in the past month the ongoing conflict in West Asia has pushed up oil prices, with inflation widely expected to reach 4% over the coming months as financial markets react sharply to the changing global outlook. Taylor said Bank estimates currently suggest a 1.25% increase in headline inflation in Q3 as a result of direct and knock-on effects.

Markets are now pricing in the possibility of multiple interest rate increases this year, with some predicting up to four rises - around 1% - before the end of 2026.

The Bank of England voted unanimously to hold interest rates at 3.75% in last week's MPC meeting, which Taylor says shows the "need to get more information about the shock before making any big changes in our policy strategy".

"For now, we are on hold, as the Governor has emphasised", he added. 

Taylor continued: "Given massive uncertainty around future energy prices, and our starting point, I currently see a high bar to hiking. Holding policy steady is preferable until the impact becomes clearer."

He believes that if the shock is relatively mild or short-lived, "inflation will rise briefly before easing, with little medium-term impact", which "could allow for more rate cuts once risks diminish".  

Taylor noted that the situation "differs markedly from 2022", when both energy and food prices surged more, and the economy had excess demand and a tight labour market. 

He concluded: "The current circumstances suggest that little change is needed at this stage. The UK faces low risks of inflation becoming unanchored, with a small shock thus far (in the grand scheme of things).

"Monetary policy is not well suited to address sudden energy shocks, which are unpredictable and outside policymakers' control. Intervention is only warranted if a large shock threatens to destabilise inflation expectations; otherwise, policy should focus on medium-term inflation targets, accommodating necessary price level adjustments."