15th Jan 2025 20:28
(Alliance News) - Bank of England rate-setter Alan Taylor on Wednesday said UK interest rates may need to be cut five or six times this year to prevent a hard landing for the UK economy.
"My view is that we’ve made it to the last half mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing," Taylor said in his first speech as a Monetary Policy Committee member.
Speaking at Leeds University Business School, Taylor said the risks around inflation have shifted in the last 12 months and, although the path may be bumpy, he expects the underlying trend of inflation to remain on track towards the 2% target from now on.
But he noted other data and forward-looking activity indicators present an "increasingly gloomy outlook for 2025".
"The labour market is near balance, but is still loosening at pace, GDP growth appears to have ground to a halt in the second half of 2024, and with confidence indicators and business expectations veering to the pessimistic, in my view the risks are now more skewed to the downside."
Taylor made the case for being "outlook-dependent", rather than "data-dependent", noting the latter is "mostly backward looking, and sometimes murky."
With the risk of demand "stalling," Taylor said there could be a need for "a more accelerated pace of rate cuts, perhaps 125 or 150 basis points in the coming year."
At its last meeting, the Bank of England pointed to a gradual easing in interest rates, while markets currently are pricing in around 50 bps worth of cuts this year.
But Taylor warned of the dangers of acting too slow which could cause a recession.
"As a final lesson from economic history, we know that growth is negatively skewed. Most expansions are slow and cumulative, a gradual climb up the stairs; but recessions can take hold quickly, sentiment can chill, and the descent is more like taking the elevator shaft."
He stressed while the downside scenario is not his base case, the risk of this eventuality has clearly been rising.
Taylor warned the BoE not to confuse noise around inflation with the underlying picture. He accepted there will be "unwelcome bumps" such as lumpy administered price changes (such as electricity and other utilities), unexpected one-time tax measures that phase in (like VAT and national insurance changes) or those that don’t phase out as expected (like, fuel duty).
He said the underlying inflation path remains slowly but steadily down towards target.
Taylor can see policy rate levelling off at a terminal rate of 2.75%, 200 basis points below the current 4.75% mark.
Taylor was one of three dovish policymakers to vote for another quarter-point cut at MPC meeting in December. While they were outvoted, markets see an 85% probability of a reduction next month after new figures on Wednesday showed inflation unexpectedly cooling.
By Jeremy Cutler, Alliance News reporter
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