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The Bank of England may have to cut interest rates as many as five or six times over the next year as the economy falters, 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 BoE’s “phased” approach to rate cuts would see four cuts of a quarter of a point by the end of 2025, bringing the cost of borrowing down to 3.75 percent.
But in the speech he warned of a growing risk that the weakening economy would require “an accelerated pace of rate cuts” that would see the BoE’s benchmark rate fall by 1.25 or 1.5 percentage points over the next 12 months.
“The latest data and forward-looking indicators of activity present an increasingly bleak outlook for 2025,” Taylor told an audience at Leeds University Business School, citing figures on GDP and business sentiment.
“We are in the last half mile of inflation, but given the weakening economy, it is time for interest rates to return to normal to maintain a soft landing,” he added, describing a scenario where price growth returns to the BoE’s 2 percent. cent target without recession.
Taylor’s negative assessment comes after he joined the minority vote for a further rate cuts last monthwith two reductions pushed through by the central bank in 2024.
The BoE, which predicted the UK economy would fail to grow in the final quarter of last year, is expected to cut further by a quarter of a point at its next meeting in February.
The cut would raise rates to 4.5 percent, after which markets expect a further quarter-point rate cut in 2025.
The outlook beyond February is less clear amid mixed inflation signals and the uncertain impact of Chancellor Rachel Reeves’ October Budget on labor costs and prices.
Gilt prices rose on Wednesday after official data offered a delay on inflation, with the total rate falling to 2.5 percent and a sharp drop in the growth of service prices in December.
Six or 12 months ago, Taylor said, there was still reason to fear that inflation had taken root in the UK economy, due to permanent changes in the way businesses set prices and wages, and an unemployment rate that had been in line with inflation since 2 percent.
This is one of three scenarios, or “cases”, the MPC is considering. If the evidence bears this out, it would require policymakers to keep interest rates higher for longer to squeeze inflationary pressures out of the system.
“It’s quite different right now,” Taylor said, noting that the MPC’s more benign case is more likely to be played out. In this scenario, the economy returned to its normal steady state, with only gradual rate cuts needed to bring inflation back to the target level in time.
But if the current situation worsens, that could require a faster, deeper cut in interest rates than the MPC anticipates, he said, urging fellow policymakers to “watch closely for signs of declining confidence.”
Most expansions, Taylor said, which joined the MPC last yearthey were “a gradual climb up the stairs; but recessions can quickly take hold, feelings can cool and the descent is more like getting into an elevator.”
Catalysts for this unfavorable scenario could include new trade wars, he said, but the biggest domestic concern was the new cash flow squeeze “already being felt by both businesses and households on various fronts”.
“If some sudden essential costs go up, such as taxes or debt servicing, then something else has to give,” Taylor added, referring to the impending rise in employers’ National Insurance contributions and the effects of higher interest rates on mortgage repayments.
Recent data points to an “increasingly bleak outlook for 2025,” he said, adding: “The labor market is close to equilibrium but still easing, GDP growth appears to have stalled in the second half of 2024, as . . . business expectations are turning pessimistic, in my opinion, the risks are now more to the downside.”
Taylor joined fellow external MPC member Swati Dhingra and BoE Deputy Governor Dave Ramsden in voting for an immediate quarter-point rate cut at the December meeting.
A majority of the nine-member committee voted to keep interest rates at 4.75 percent, with BoE Governor Andrew Bailey saying that “a gradual approach to future rate cuts remains the right thing to do.”