BOE's Taylor backs extended hold for interest rates

[LONDON] Bank of England policymaker Alan Taylor said on Tuesday (Jun 23) that an “extended hold” for interest rates was the right response to the increase in price pressures spurred by conflict in the Middle East.

Taylor, an external member of the Monetary Policy Committee (MPC), said he doubted a new cycle of wage and price inflation could be reignited by the current “benign” financial market pricing for interest rates and energy.

He also described Britain’s economy as “very weak” before the outbreak of war.

But Taylor, an academic economist who favoured cuts to interest rates before the Iran war, emphasised the lack of clarity around the economic outlook and whether peace would hold in the Middle East.

“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,” Taylor said in the text of a speech due to be delivered at an event hosted by Barclays and the Centre for Economic Policy Research, a think tank.

Unlike other members of the MPC, Taylor places the most weight on downside risks for Britain’s economy that might in the future require rate cuts from their current level of 3.75 per cent.

If a benign scenario in terms of inflation pressure plays out, Taylor said interest rate cuts should resume towards his 3 per cent estimate of neutral – the point at which monetary policy no longer stimulates nor restrains the economy.

He described the BOE’s high-inflation scenario “C” as a tail risk, albeit one that would force the central bank to act to preserve the inflation target.

Taylor expressed misgivings about the ways in which the BOE conditions its forecasts for the economy and its policy stance.

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He said the market rate curves used to underpin the BOE’s forecasts had overstated where investors actually expected rates to go, because those curves include a risk premium on top of rate expectations. This made the BOE’s implied policy stance “excessively restrictive”, Taylor said, especially towards the end of its three-year forecast horizon where the central bank’s economic models would infer the existence of a positive demand shock to get inflation to the 2 per cent target. REUTERS