Rate setter joins calls for a full 1% cut to defend against a "falling down an elevator shaft" recession
News broke yesterday that inflation has fallen more than expected and, as a result, the Bank of England (BoE) is facing increasing pressure to accelerate mortgage interest rate cuts as the UK economy shows signs of slowing growth and a potential downturn. Economists and policymakers have highlighted the need for proactive measures to address the challenges of weakening demand and persistent inflationary concerns, and the bank is widely expected to cut rates from 4.75% to 4.5% at its next meeting on February 6.
In a speech released yesterday, Alan Taylor, a member of the Bank’s Monetary Policy Committee (MPC) since September, outlined the risks facing the economy and called for early rate cuts. “It makes sense to cut rates pre-emptively to take out a little insurance against this change in the balance of risks,” he said, emphasising that current rates remain restrictive. Taylor, an economics professor at Columbia University, proposed a full percentage point reduction in the base rate under the BoE’s central scenario, with larger cuts in scenarios where inflationary pressures ease more rapidly.
Diverging expectations on rate cuts
A survey conducted by Reuters revealed that a majority of economists expect the BoE to reduce its base rate four times in 2025, bringing rates down to 3.75%. However, market expectations are more conservative, with futures pricing in just two quarter-point cuts. All 65 economists polled anticipated an initial rate cut at the BoE’s February meeting.
Taylor’s suggestions echo concerns raised by other economists, who have pointed to a slowing economy and declining inflation. British inflation, which unexpectedly slowed last month, may provide the central bank with the flexibility to implement deeper rate cuts. Yet, inflation risks remain a key consideration, particularly as global factors, including recent bond market volatility, add to domestic pressures.
Scenarios for economic policy
The BoE has outlined three possible scenarios for the economy, with varying implications for monetary policy. In the central scenario, inflation remains persistent, necessitating gradual rate reductions. Alternatively, if inflation weakens more than expected, cuts of up to 1.5 percentage points may be required. However, Taylor warned of the potential for a more severe economic slowdown, describing a scenario in which rapid disinflation and a sharp decline in output demand swifter and larger rate cuts.
“Most expansions are slow and steady, like climbing stairs, but recessions can be sudden, like falling down an elevator shaft,” Taylor said. His remarks suggest he will advocate for further cuts at upcoming meetings.
Inflation and market challenges
Inflation remains a critical variable. While the consumer price index (CPI) is forecast to average 2.5% in 2025, 60% of surveyed economists believe the figure could exceed estimates. A recent depreciation of the pound and a rise in UK government bond yields have added complexity to the BoE’s policymaking. Former MPC member Michael Saunders noted that higher yields, driven by both global and domestic factors, may require the BoE to keep rates elevated to counter inflationary pressures.
Despite these challenges, the UK economy is expected to grow modestly in the coming years, with forecasts suggesting an expansion of 1.3% in 2025 and 1.5% in 2026. However, Taylor cautioned against complacency, highlighting the ongoing “cashflow squeeze” faced by households and businesses due to rising costs.
