A British policymaker has warned that the Bank of England may need to cut interest rates as many as five or six times in the coming year as the economy stalls, urging the central bank to act to ensure a "soft landing".
Alan Taylor, an external member of the Monetary Policy Committee, said on Wednesday that the Bank of England's "gradual" approach to interest rate cuts would mean a 4 basis point cut by the end of 2025, bringing borrowing costs down to 3.75%.
But he warned in a speech that an increasingly weakening economy would require "faster rate cuts", raising the risk that the Bank of England's benchmark rate would fall by 1.25 or 1.5 percentage points over the next 12 months.
"The latest data and forward-looking activity indicators point to an increasingly gloomy outlook for 2025," Taylor told an audience at Leeds University Business School, citing GDP and business confidence figures.
"We are in the last half mile of inflation, but with the economy weakening, it is time to normalize interest rates to maintain a soft landing," he added, describing a scenario for price growth returning to the Bank of England's 2% level. goals without a recession.
Taylor's downbeat assessment came after he joined a minority vote last month calling for further rate cuts on top of the two the central bank has pushed for in 2024.
The Bank of England had predicted that the British economy would fail to grow in the last quarter of last year, and the market is generally expected to cut interest rates by a further 25 basis points at its next meeting in February.
This rate cut will bring interest rates to 4.5%, after which the market expects interest rates to be cut by a further 25 basis points in 2025.
The outlook beyond February is less clear due to mixed inflation signals and the uncertain impact of Chancellor Rachel Reeves' October budget on labor costs and prices.
Official data has eased inflation to a certain extent, with the overall interest rate falling back to 2.5% in December, service price growth falling sharply, and the price of gilt-edged British government bonds rising on Wednesday.
Taylor said six to 12 months ago there was still reason to worry that inflation had become entrenched in the UK economy, with lasting changes in the way businesses set prices and wages and unemployment consistent with an inflation rate of 2 per cent.
This is one of three scenarios or "cases" the Monetary Policy Committee has been considering. If there is evidence of this, it would require policymakers to keep interest rates higher for longer to remove inflationary pressures from the system.
"Things are very different now," Taylor said, noting that the MPC's dovish case was more likely to be playing out. In this case, the economy has returned to its normal stable state and only gradual interest rate cuts will bring inflation back to target in time.
But he said if the current situation worsens, a faster and deeper rate cut than expected by the Monetary Policy Committee may be needed, and called on policymakers to "pay close attention to signs of declining confidence".
Taylor, who joined MPC last year, said most expansions are "a gradual climb up the stairs; but recessions can happen quickly, sentiment can cool and the descent is more like a ride in an elevator shaft."
He said catalysts for such a headwind could include a new trade war, but the biggest domestic concern was a new cash flow crunch that "businesses and households are already feeling across the board."
"If some basic costs suddenly rise, such as taxes or debt servicing, then other costs have to be paid," Taylor added, referring to upcoming increases in employer national insurance contributions and the impact of rising interest rates on mortgage repayments.
He said recent data pointed to an "increasingly gloomy outlook for 2025", adding: "The labor market is close to equilibrium but is still accelerating in easing, with GDP growth looking to stall in the second half of 2024, as... business expectations Turning to pessimism, the risks are now tilted more to the downside in my view.”
Taylor joined external members of the Monetary Policy Committee 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%, with Bank of England Governor Andrew Bailey saying "gradual interest rate cuts in the future remain the right approach".