The case for raising interest rates is “not compelling” unless energy prices remain high for longer and have a greater impact on the wider economy, Bank of England policymaker Alan Taylor has said.
Taylor, a member of the Bank’s Monetary Policy Committee (MPC), played down the need to increase borrowing costs amid growing expectations that an interest rate rise could be on the horizon.
Speaking at the Dow Lecture at the National Institute of Economic and Social Research, he said higher energy costs so far appeared to be concentrated largely within the energy sector rather than spreading widely through the economy.
“Against that backdrop, the case for further rate increases is not compelling to me unless energy prices remain high for an extended period and also generate clearer signals of a transmission into broader inflation persistence,” he said.
Taylor said the case for an increase should be based on evidence that so-called second-round effects were gaining traction, rather than on the energy shock alone. Such effects can include workers seeking higher wages to offset increased living costs, or businesses raising prices because they expect consumer and market behaviour to change.
Some policymakers have said there have been limited signs of these effects in the UK economy as inflation has risen.
Taylor’s remarks echo comments by Bank Governor Andrew Bailey, who said the direct effects of the energy shock were clear but that its pass-through to the wider economy was currently “subdued”. The shock, triggered by the US-Israel war with Iran, has included spikes in petrol and diesel prices and an increase in the household energy price cap.
Bailey also said that, although bank rates had not been increased, it would become harder to maintain that position while energy prices remained higher.
Deputy Governor Clare Lombardelli recently said energy price pressures could lead to an interest rate increase unless the economy proved particularly weak.
Bailey, Lombardelli and Taylor were part of the six-to-three majority that voted to keep UK interest rates at 3.75% earlier this month.
In contrast with some of his fellow MPC members, Taylor pointed to the possibility of rates falling in future if inflationary pressures ease and energy risks diminish. He said policy would eventually need to move in the other direction because maintaining an unnecessarily restrictive stance would itself carry costs.
