BOE's Taylor Calls for Three More Rate Cuts in 2025

Bloomberg

02-07-2025

00:00
You've been in the job for a year. What's been the biggest difference? Well, thank you, Francine. It's supposed to be here. It is coming up on a year. And I think that's causing me to reflect, especially here in a breezy center, that the the economic winds have been shifting. So the way I would describe the evolution of my outlook and my thinking is I, I think a year ago, as in many central banks, the the view was that we were on track for a soft landing. We'd had a burst of high inflation rates and rates have been elevated to counteract that with high interest rates in the past, you would have normally expected some kind of slowdown in the economy, but that kind of damage wasn't happening. So there was a lot of optimism around that and I think a sense that we were progressing back towards target without undue economic damage. Now, things have shifted. I think I would say now that soft landing is at risk in my view. We've seen the economy slowing down in the UK, inflation in terms of core measures coming back towards target. There is a bump in 2025, which we're going to talk about, I'm sure. But now my worry is when we get into 2026, we're coming back to Target. But the danger could be overshooting to the other side, where we end up with the economy below capacity and inflation potentially undershooting. So I think that that's the sort of now. Yeah. And Alan, you've been very clear that you think we're so far away, away from where you think the neutral rate is. So would you go to bigger cuts? I don't think bigger cuts are necessarily needed or desirable, but I think, you know, we only meet eight times a year. So there's a kind of integer problem. You've got so many cuts you can do in a year. The market has interpreted, you know, gradual to mean once a quarter. But if you feel that a slightly faster easing might be needed, if you're worried about mounting downside risks, then you need to get an extra cut in somewhere if you think maybe five cuts are needed. So, you know, it could come at different points depending on how the centre of the committee moves. Will you vote for a 50 basis point cut again? Well, I'm not going to prejudge my vote. I think everything has to be taken into consideration afresh, each meeting. So as everyone likes to say, we're not on a preset path. It's it almost doesn't need to be said, but you have to look at the data afresh each time. And we're going to be getting new information on the trajectory of inflation. We're coming out with a new forecast in August. We're going to have more information about where wage settlements are landing, which is a particularly important indicator for me and for the rest of the committee. So I think we're going to look at that and each time. How much do you worry about the labour market and it actually deteriorating quickly? We've seen signs in certain data. Yeah, I think we're starting to see cracks there. So the unemployment rate is rising in a new forecast, latest forecast, it's going to top out at around 5%. Vacancy to unemployment ratio has been coming down very steadily. It was tight a year ago. That's another big change. And Steph, to judgment now is that we've got some labour markets like. So I think we're in a point now where we've got slack in the economy, we've got an output gap. And so I'm comfortable there that the underlying inflationary pressures in terms of the demand and supply balance and I am tipping the other way. So I think that's helping the disinflation process along quite helpfully in inflation though, do worry about second round effects. I mean, again, there's there's concern about what happens after the trade negotiations in the next couple of weeks and months. Right. So I think I'd maybe separate that into into three little chunks. I know you've got a lot to go through, but I'll go with the rule of three here. So second round effects, I worry about those most with energy, right. So energy is a key input. It's it's well at the chain in terms of you know, it's upstream from a lot of things. It's an input used in many other sectors. So the energy shock look back at the history of the last 50 years, what's taken us away from Target the most. It's been two big energy shocks in the seventies and now. And so second round effects that are a big worry, something like food, it's more of a final product. I don't worry about the transmission through the input output structure of the economy, but you worry more there about does it dislodge inflation expectations. So I think the key to me though, is to focus on expectations measures. They don't always disagree. Households, financial markets, businesses say different things, but I think that's that's maybe less of a concern than if we have an energy shock. But given that I mean, there was a because of the energy shock, is there, you know, a worry that actually you have the deteriorating labour market, but also inflation going through a tough time in the next couple of months? Yeah. So this was really why I was kind of a little bit in a wait and see mode in the start of the year. In the first quarter, the first two meetings I was hit with a lot of new data. The hump became apparent. A lot of that was from administered prices, so it wasn't really something predictable out of the demand. And supply balance in the economy. It was news about electricity, about water, about Texas, about any number of things. Those stick around. Once they're in, they're in for 12 months. But we're fairly comfortable at the moment saying when that 12 month period comes to an end, they're going to start to fall off in 2026. So I think is that as we get more comfortable and more data came in and the underlying measures, particularly the wage inflation I mentioned, we started to see wage settlements which were coming in absolutely in line with our agents PACE survey as we went through 2025 over the last few months, I felt more comfortable that that disinflation process is intact and it's progressing as I would have expected. I need to ask you about Katy, because we had a hint yesterday from Governor Bailey that we may be getting a smaller overall balance sheet run off in the next year or two because of constraint liquidity at the end of the curve at the long end curve. Do you think sticking to the £100 billion run off would actually be too rapid? Well, as the governor mentioned, we're about to go into the review of that actually starts this week. And I'm going to spend two months poring over the figures, thinking about the situation and the context matters. We're in a different place than we were a year ago. So that has to be taken into consideration. I mean, the broader context here is that we're transitioning to a different regime in the long run with liquidity coming through repo rather rather than through outright asset purchases. And that should be a gradual transition, and that's what we have in mind. So I think that destination hasn't changed. But just as we said a moment ago, with the right decision not being on a preset path, I don't think one should think of the q t being on a preset path either. So it's a very much alive decision and I think we have to look look at the context, liquidity in the market, how does it interact with monetary policy? We're voting as the Monetary Policy Committee. Do we think asset purchases and sales are perfect substitutes for bank rate? That may not be strictly true. Not without a lot of, you know, very special assumptions. So I think all of that is going to be taken into consideration.