Bank of England policymaker plays down inflation risk in call for rate cuts

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A member of the Bank of England’s Monetary Policy Committee has dismissed stronger than expected inflation and growth figures as he renewed his call for lower interest rates in the face of mounting pressures on the UK economy. 

Alan Taylor told the Financial Times that the current upsurge in inflation was being driven by one-off factors as he stressed the drag on growth from uncertainty generated by US President Donald Trump’s trade war. 

While there had been some “welcome” developments in trade, including the UK-EU reset deal, these only affected a small part of UK trade, added Taylor, an external member of the MPC since September.  

Asked whether he would back a rate cut at the next BoE meeting in June, Taylor — who voted for a half-point reduction this month — said: “I’m not going to pre-emptively announce my vote, but I think I indicated in my dissent that I thought we needed to be on a lower [monetary] policy path.

“I’m seeing more risk piling up on the downside scenario because of global developments,” he said, adding that the impact of Trump’s tariffs on imports would “be building up over the rest of this year in terms of trade diversion and drag on growth”.

The MPC this month lowered rates by a quarter-point to 4.25 per cent, their lowest level since 2023, in a meeting that exposed sharp divisions among the nine policymakers.

Taylor, a professor at Columbia University, was joined by fellow external member Swati Dhingra in a dissenting vote for a half-point reduction.

Two other members — BoE chief economist Huw Pill and external member Catherine Mann — said rates should be held because of persistent inflation. 

Since the MPC met on May 7, official figures have showed a stronger than expected 0.7 per cent increase in GDP in the first quarter, while inflation rose more than expected to a 15-month high of 3.5 per cent in April, prompting traders to pare bets on further rate cuts. 

But arguing that recent data had been roughly in line with BoE expectations, Taylor said he remained “pretty concerned” about the economic outlook.

Forecasters had predicted a firm first quarter, he said, as companies brought forward activity ahead of Trump’s trade barriers.

“A trade war is going to be negative for growth,” he added. Trade policy “is going to be a drag on growth for both the frictional reason and the uncertainty reason”.

Taylor’s comments came before a US court on Wednesday ruled that Trump’s “liberation day” tariff scheme was illegal, casting fresh uncertainty over the global trade outlook. The White House has vowed to appeal against the ruling.

While inflation had been “very strong” in April, he added, the 3.5 per cent reading was heavily affected by increases in charges such as the energy price cap and regulated water bills — rises that had been widely anticipated.

“[The BoE] forecast path is saying there is going to be an inflation hump and then it’s going to go away,” he said, emphasising that he was voting on interest rate policy changes that will only fully affect the economy in nine or 12 months’ time — or beyond.  

“[Higher inflation] is not coming from demand and supply pressures; for the most part, it’s coming out of one-time tax and administered price changes,” he said, stressing that energy prices had been trending downwards.

Slack was “continuing to open up” in the UK economy, Taylor added, describing a survey by the BoE’s network of agents that pointed to pay settlements by businesses of 3.7 per cent this year as potentially reassuring because it was “within touching distance of sustainable wage growth”.

Companies were telling the central bank they would not be granting wage settlements that are “anything like” as high as last year, he said, given softer demand and higher employer national insurance contributions.

Ministers have been emphasising the benefits of a trio of pacts struck in recent weeks with India, the US and the EU. Taylor suggested the outline deal with the US reduced frictions relative to Trump’s liberation day tariff package, but “we are not getting back to where we were before”. 

Similarly the deal with the EU eases frictions in the areas of agriculture and food trade, which Taylor said was positive but not of wide-ranging impact on UK trade. 

“These other things are perhaps welcome in their effects in certain sectors, but I think we need to keep our eye on the big shocks,” he said. “We got a massive change in trade policy, we have a lot of uncertainty: I would focus on that as the big story” to first order.