Bank of England’s Newest Rate-Setter Shows Dovish Leaning

(Bloomberg) — The Bank of England may cut interest rates faster than markets are betting if the economy weakens, according to its newest rate-setter Alan Taylor.

In his first public appearance since joining the Monetary Policy Committee, Taylor told UK lawmakers on Tuesday that higher mortgage costs and a “wait-and-see” approach by consumers and businesses are “weighing on the economy.”

“If conditions are weaker, and my own views skew to the downside risk now versus the upside risk of about a year ago, then we could go faster,” he said in testimony to the House of Commons Treasury Committee of rank-and-file MPs.

His more dovish comments suggest a shift in the balance on the Monetary Policy Committee after he replaced one of its hawks Jonathan Haskel. Since joining, Taylor has voted with the consensus, first for no change in rates in September and then a quarter-point cut in November. 

Debt-servicing costs would weigh on consumers as more mortgages are refinanced at higher rates, he said. Meanwhile, job vacancies are falling, firms appear reluctant to go ahead with investment and households are choosing saving over spending in the wake of recent economic crises. 

Crucial, he said, will be developments in the labor market, where there is a risk of dislocation as companies decide how to respond to a huge payroll tax hike announced in the budget and another increase in the minimum wage.  “There’s a lot of factors just making me very, very worried now.”

Taylor was facing questions alongside BOE Governor Andrew Bailey, Deputy Governor Clare Lombardelli and external rate-setter Catherine Mann. Bailey reiterated the central bank’s “gradual” approach to lowering interest rates after cutting only twice this year. 

Bailey appeared to hint at Taylor’s dovish stance when asked about the inflation outlook. “I’ve got risks on both sides. To be honest with you, if you’d asked me this question a month or so ago, I’d have probably been a bit closer to where Alan is,” he told MPs.

While Bailey has resisted defining what pace “gradual” implies, Taylor suggested that it aligned with reducing rates once a quarter rather than the more aggressive approaches being taken in the US and eurozone. Traders currently expect an even slower pace in the UK and are pricing in little more than half a percentage point of easing by the end of 2025.

What Bloomberg Economics Says…

“Bloomberg Economics’ Spectrometer suggests rates will be kept on hold in December, but the decision is set to be divided. The most dovish rate-setter, Swati Dhingra, will likely back further easing as the majority hold. While Governor Andrew Bailey and deputy governor Clare Lombardelli strengthened the case for gradualism, external member Alan Taylor has kept the door open to easing at consecutive meetings. At the other end of the spectrum is Catherine Mann, who has pledged to keep policy on hold until there’s clear evidence of subdued price pressures. Bloomberg Economics expect the BOE to stick to a quarterly pace of easing in 2025, with rates ending next year at 3.75%.”

Taylor said that lower-than-expected inflation in recent months suggests a shift “toward a more normal scenario,” giving him “reassurance to think it’s OK to continue with the gradual pace of cuts.” He said the risk of the BOE’s most pessimistic case had declined.

“I think there has been progress,” he said. “There was reason to be cautious I think six months or a year ago but the unfolding data is I think in line with historical patterns.”

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