Bank of England’s Taylor: High rates could push UK into recession
The UK risks heading into a recession that will be “difficult to contain” if interest rates are kept on hold into next year, a Bank of England rate-setter has said in a speech that has further exposed widening splits between policymakers over the best path for borrowing costs.
In a set of dovish comments made in Cambridge, external Monetary Policy Committee (MPC) member Alan Taylor claimed the upside risks to inflation remained low relative to the “downward trajectory in output” evident in the softening labour market and scant business confidence.
“The risk [of a hard landing] is rising,” he told an event at King’s College. “In this scenario, weak demand at home can lead to a more forceful downturn, where recession dynamics start to kick in that can be very difficult to contain or even reverse. The economy has been flirting with zero growth, and the realisation of negative readings could easily change the future path for the worse.”
Taylor, who has dissented at five of the last seven MPC votes in favour of lower interest rates, also warned inflation was likely to undershoot expectations in late 2026, causing “undue damage to economic activity”.
Splits emerging at Bank of England
The speech is yet another sign of a growing divide emerging between different camps on the MPC over the correct direction for the UK’s monetary policy.
With inflation at nearly double the Bank of England’s two per cent target, some rate-setters fear elevated household and business inflation expectations will spark a round of second-round effects that will further embed price rises into the economic outlook.
Last week, external member Catherine Mann called for interest rates to remain on hold well into next year to ensure rate-setters squeezed out inflation that had become “persistently persistent”. Mann’s comments were followed by a similar speech from Megan Greene, who said she favoured the Bank’s headline borrowing cost to remain at four per cent until at least March next year.
But others, including two of Andrew Bailey’s deputies Sarah Breeden and Dave Ramsden, have used speeches to argue that the underlying path of inflation remains on track despite the elevated headline rate.
The MPC’s dovish contingent believe Bank officials should look through the current bump in price rises, which they attribute mostly to the Chancellor’s inflationary hike to payroll tax and regulated price increases.
Taylor echoed that sentiment on Tuesday, and added to those warnings the heightened risk of the UK receiving an influx of cheap goods as a result of tariffs being ratcheted up elsewhere in the global economy.
“If we underestimate the forces of trade diversion washing up on our shores in the next year or two, our inflation forecast will miss the mark,” he said.