(Bloomberg) — Bank of England rate-setter Alan Taylor called for pre-emptive interest-rate cuts to prevent a hard landing for the UK economy, as he warned of a recession risk if officials act too slowly.
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In his first speech on Wednesday, Taylor said that borrowing costs may need to drop into stimulative territory to combat a new possible scenario where the economy weakens further and inflation cools more quickly.
“I think it makes sense to cut rates pre-emptively to take out a little insurance against this change in the balance of risks,” he said in a speech at Leeds University Business School.
“We are in the last half mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing,” he added.
The comments suggest that Taylor may back rapid rate cuts this year to support the economy after a deterioration in growth indicators since Labour took power last summer.
Taylor was one of three dovish policymakers to vote for another quarter-point cut at the meeting in December. While they were outvoted, markets see an 85% probability of a reduction next month after new figures on Wednesday showed inflation unexpectedly cooling.
The BOE has three possible scenarios for inflation, ranging from a benign case where pressures fade quickly to one where structural changes in the economy mean higher interest rates are needed in the long run. Taylor sees the two cases that are least concerning on inflation as the more likely and thinks the BOE could need to reduce bank rate by up 150 basis points in the coming year if the the most benign one transpires.
However, he also cautioned that a new scenario could materialize should the economy continue to deteriorate, meaning the central bank may need to make more drastic cuts, taking rates below the neutral level into stimulative territory.
“The risk of this case may be small as of now, but the costs, both of undershooting the inflation target and of a recession, could be very high,” he said.
Taylor warned of the risk that the BOE misjudges the inflation threat or is too late to recognise a benign outcome.
“We would run the risk of undershooting the inflation target while falling into an unwanted recession,” he said.
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