The BoE may need to accelerate rate cuts next year, the policymaker says

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The Bank of England may need to cut interest rates as many as five or six times as the economy stagnates, a UK policymaker has warned.

Alan Taylor, a foreign member of the Monetary Policy Committee, said on Wednesday that the BOE’s “gradual” rate-cutting approach would see four quarter-point cuts by the end of 2025, taking borrowing costs to 3.75 percent.

But in his speech, he warned of growing concerns that the weak economy would require an “accelerated rate cut”, which could lead to a cut in the BoE’s benchmark rate of 1.25 or 1.5% over the next 12 months.

“Recent data and forward-looking activity indicators show an increasingly gloomy outlook for 2025,” Taylor told an audience at Leeds University Business School on GDP and business sentiment.

“We are in the last half mile of inflation, but with the economy weakening, now is the time to return interest rates to normal to maintain a soft landing,” he said, adding that inflation would return to the BoE’s 2 per cent rate. 100% target without recession.

Taylor’s downgrade came after he joined for a minority vote. A further reduction in the last monthIn addition to the two concessions by the central bank in 2024.

The BoE, which predicted that the UK economy would not grow in the last quarter of last year, is widely expected to cut another quarter point at its next meeting in February.

The cut would take rates to 4.5 percent, after which markets expect another quarter-point rate cut in 2025.

The outlook beyond February is unclear due to mixed signals on inflation and the unexpected impact of Chancellor Rachel Reeves’ October budget on labor costs and prices.

Gilt prices rose later on Wednesday. Official information provided some respite On inflation, the headline pace slowed to 2.5 percent and service price growth fell sharply in December.

Six to 12 months ago, Taylor said, there are reasons to fear that inflation is entrenched in the UK economy; This is due to permanent changes in the way businesses set prices and wages, and the unemployment rate is in line with 2 percent inflation.

This is one of three scenarios, or “cases”, the MPC has been considering. If the evidence supports that, it would require policymakers to hold interest rates higher for longer periods of time to get inflation out of the system.

“It’s very different now,” Taylor said, adding that the MPC seems to be playing a more benign case. In that case, the economy is back to normal, inflation only needs to slow down to bring it back in time.

But if the current situation worsens, the MPC may call for faster and deeper interest rate cuts than expected, urging policymakers to “watch closely for signs of confidence”.

Most expansions, said Taylor, who He joined MPC last year.“Climbing the stairs slowly; but the fall can quickly take hold, the feeling freezes and going downhill is like taking an elevator shaft.”

Reasons for this bleak situation could include new trade wars, but the biggest domestic concern is a new cash flow crisis “being felt on multiple fronts by both businesses and households,” he said.

“Something else has to give if unexpected essential costs such as tax or debt servicing are added,” Taylor added, referring to the effect of employer National Insurance contributions and higher interest rates on loan repayments.

The latest data points to a “darkening outlook for 2025,” adding that “the labor market is balanced but still slowing rapidly, GDP growth appears to have stalled in the second half of 2024, and in . . . Business prospects are turning pessimistic, in my view the risks are now skewed to the downside.

Taylor was joined by outside MPC member Swati Dhingra and BOE Deputy Governor Dave Ramsden in voting for a faster quarter-point rate cut at the December meeting.

A majority of the nine-member committee voted to keep interest rates at 4.75 percent, BoE governor Andrew Bailey said, “a gradual approach to future interest rate cuts is right.”