BOE Taylor: We are a good distance from impartial degree of rates of interest

BOE Taylor says:

• We are a long way from the neutral level of interest rates
• Neutral rate for me is 2.75 – 3% in the UK.
• Erosion of business confidence in the UK has continued in REC and PMI surveys..
• There is a sense of precaution and concernt
• Tariff shock was bigger than anyone expected.
• Although there are signs of a pause, we don’t know where it will go.
• Wage settlement data is coming in line with expectations for slower wage growth.
• Central forecast of BOE had quite mild treatment of global trade situation
• The UK/US trade deal is quite slender.

Last week, the Bank of England reduced its base interest rate by 0.25 percentage points to 4.25%, marking the fourth cut since August 2024. The decision was made amid easing inflationary pressures and concerns over global economic uncertainties, particularly stemming from recent U.S. tariffs.

The Monetary Policy Committee’s vote was notably divided. The decision was supported by five members: Governor Andrew Bailey, Sarah Breeden, Megan Greene, Clare Lombardelli, and Dave Ramsden.

Two members including Swati Dhingra and Taylor, advocated for a larger 0.5 percentage point cut, citing concerns over subdued inflation and potential impacts from global trade tensions. Taylor’s comments support his bias.

Conversely, Catherine L. Mann and Chief Economist Huw Pill voted to maintain the rate at 4.5%, expressing worries about persistent inflation pressures, particularly from wage growth and services inflation.

This three-way split underscores the MPC’s differing views on balancing inflation risks against economic growth considerations.

While inflation stood at 2.6% in March, the Bank anticipates a temporary rise to 3.5% in the third quarter due to factors like higher energy prices, before returning to the 2% target by early 2027 . The Bank also highlighted that recent U.S. tariff increases are expected to weigh on global growth, adding to the cautious outlook for the UK economy .