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The Bank of England may need to cut interest rates by up to five or six times over the next year due to the faltering economy, a UK policymaker has warned, urging the central bank to take action to ensure a “soft landing”.
Alan Taylor, an external member of the Monetary Policy Committee, said on Wednesday that the Bank of England's “gradual” approach to interest rate cuts implied cuts of a quarter of a percentage point by the end of 2025, raising the cost of borrowing to 3.75 percent.
But he warned in a speech of growing risks that a weak economy would need a “faster pace of interest rate cuts” that would see the Bank of England's benchmark interest rate fall by 1.25 or 1.5 percentage points in the next 12 months.
“The latest data and forward-looking activity indicators present an increasingly bleak outlook for 2025,” Taylor told an audience at the University of Leeds Business School, citing figures on GDP and business sentiment.
“We are in the last half mile in terms of inflation, but with the economy weakening, it is time to move interest rates back towards normal to maintain the soft landing,” he added, describing a scenario in which price growth returns to the Bank of England's 2 percent level. The target of 100 is below stagnation.
Taylor's pessimistic assessment comes after he joined the minority vote in favor of A Further cut in interest rates last monthin addition to the two cuts paid by the central bank in 2024.
The Bank of England, which predicted that the British economy would fail to grow in the final quarter of last year, is widely expected to make an additional quarter-point cut at its next meeting in February.
The cut will raise interest rates to 4.5 percent, after which markets expect a further rate cut of a quarter of a percentage point in 2025.
The outlook beyond February is less clear due to mixed signals on inflation and the uncertain impact of Chancellor Rachel Reeves' October Budget on labor costs and prices.
Gold prices rose on Wednesday after Official data has provided some relief On inflation, with the headline rate falling back to 2.5 percent and service price growth falling sharply in December.
Taylor said that six or 12 months ago, there were still reasons to fear that inflation had become entrenched in the UK economy, due to permanent changes in the way businesses set prices and wages, and an inflation-aligned unemployment rate of 2 per cent.
This is one of three scenarios, or “cases,” the MPC has been considering. If this evidence is confirmed, it will require policymakers to keep interest rates higher for longer to take inflationary pressures out of the system.
“Now it's very different,” Taylor said, noting that it seemed likely that a more dovish case for the MPC was beginning to emerge. In this scenario, the economy returns to its normal stable state, with only gradual interest rate cuts needed to bring inflation back to target in a timely manner.
But if the current situation worsens, it could require faster and deeper interest rate cuts than the MPC had envisioned, and he called on fellow policymakers to “watch closely for signs of waning confidence.”
Taylor said that She joined the Monetary Policy Committee last yearIt was a gradual climb up the stairs; but recessions can quickly take hold, feelings can cool, and the descent is like taking an elevator shaft.
He said the catalysts for this negative scenario could include new trade wars, but the greater domestic concern was about new cash flow pressure “already being felt by businesses and households on different fronts.”
“If some sudden underlying cost goes up, like taxes or debt servicing, then something else has to happen,” Taylor added, referring to the impending rise in employer National Insurance contributions, and the effects of rising interest rates on mortgage repayments.
He said that recent data indicate an “increasingly bleak outlook for 2025,” adding that “the labor market is approaching equilibrium, but is still declining at a rapid pace, and GDP growth appears to have stalled in the second half of 2024, and with . . . Business expectations are skewed to pessimism, and in my view the risks are now more skewed to the downside.
Taylor joined fellow external MPC member Swati Dhingra and Bank of England Deputy Governor Dave Ramsden in voting for an immediate quarter-point rate cut at the December meeting.
The majority of the nine-member committee voted in favor of keeping interest rates at 4.75 percent, with Bank of England Governor Andrew Bailey saying that “a gradual approach to reducing interest rates in the future remains correct.”
