Alan Taylor, member of the Bank of England's Monetary Policy Committee (MPC), says Bank Rate needs to be "on a lower path over the year to come".
Explaining his reasoning behind voting for a lower level of Bank Rate at the MPC's recent meetings, Taylor said: "Should we close in to a state of the world where all shocks have mostly dissipated, I would expect Bank Rate to normalise at close to the central estimate of 2.75%. That means with Bank Rate currently at 4.25% we still have a long way to go to get to neutral, and our current policy is still quite restrictive."
Taylor acknowledged the 'bump in inflation' in May's forecast, but believes "by late 2026 we are again very close to 2%". He predicts Bank Rate to be around 3% by the end of 2026, if inflation still sits a bit above target.
However, the Bank of England's forecasts anticipate a "much higher level of rates in 2026 and 2027, levelling off between 3½ and 4%", Taylor notes. He warns this would "imply continued, and even increasing restrictiveness in our monetary policy stance in 2026 and into 2027. This, to my mind, risks pushing inflation below target and opening up an unduly large degree of slack."
In February and March, Taylor voted with the majority to make one 0.25% cut in February and no cut in March. He said he was "happy at that time to wait and let more data materialise to be sure that we understood the bump, we had more insight into wage and services inflation dynamics, and hopefully more clarity of the uncertain and shifting global economic environment".
Taylor continued: "Recently, I have felt more assurance on these three factors. The 2025 bump remains but is expected to subside as the causal factors peel away with a 12-month lag. The incoming data suggest wage settlements of about 3.7% in 2025, a big step down from last year, and close to a target-consistent level, and labour market slack has opened up and is expanding. Globally, trade war tensions remain, despite the many pauses, and both the uncertainty effect and the mechanics of trade diversion imply downside risks to our inflation forecast.
"So in the near term I see stronger disinflationary forces building up over the rest of this year, and then in the medium term I see a need to reach for a lower neutral level over the course of 2026 and 2027 should we be able to normalise smoothly. For those two reasons, I was persuaded to not only vote for a lower level of Bank Rate now but also to signal the need to be on a lower path over the year to come."
Taylor believes that "a better risk management approach at this point is to cut and hold for longer later, rather than hold too much, and have to cut in a hurry later".
He concluded: "I think right now some insurance against deteriorating demand is advisable, and I think macroeconomic history shows that insurance is best taken out sooner rather than later. For sure there will be future shocks, and our policy interest rate must react to them as they materialise, to get the degree of restriction or accommodation right. But, that is something to be judged relative to neutral."
