Taylor Says BOE Must be Ready to Cut Rates in Benign Scenario

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(Bloomberg) — Bank of England official Alan Taylor said policymakers need to be ready to act with interest-rate cuts should a benign scenario on inflation play out.

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Taylor said on Tuesday that borrowing costs need to remain on hold for now given the huge geopolitical uncertainty facing the rate-setters. However, the rate-setter, who is one of the most dovish officials on the nine-member Monetary Policy Committee, raised the prospect of the UK central bank resuming rate cuts in a scenario close to what energy markets are pricing in.

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“One can still imagine that we might end up in a fairly benign scenario,” he said at a Barclays Plc event in London. “If something closer to that benign scenario plays out, we must be ready to act. In my view, interest rates can and should resume their downward path to neutral.”

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The comments show how the debate over policy is quickly shifting at the UK central bank since the US and Iran agreed to extend their truce. The sharp falls in oil prices since news of a deal broke means inflation may end up being closest to the BOE’s most optimistic scenario.

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The BOE had been expected to reduce rates further just before the war broke out but it shifted to leaving borrowing costs on hold and markets even moved to pricing in hikes. It caused the central bank to ditch its central inflation projection in April and lay out three different scenarios for inflation after the energy shock caused by the war. 

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Like fellow official Megan Greene earlier this month, Taylor laid out an alternative scenario for inflation. He warned the BOE must resist “the temptation to fight the last war.” Key is the weak state of the UK economy ahead of the US and Israeli attacks on Iran in late February, he said. 

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“Now looks very different to 2022, or as compared to other previous energy shocks in 2011 or even going back to the 1970s,” Taylor said. “We enter this shock with a very weak economy. In purely domestic terms, there is excess supply or slack in labor market, and a meaningful output gap.”

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Taylor appeared to criticize the move away from a central projection, saying households and businesses still need a “sense of the most likely path of inflation and rates.”

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“They need a baseline against which to interpret news,” he said. “If central banks don’t articulate a central view, the risk is that others will fill the vacuum — markets, commentators, or other policymakers.”

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