Alan Taylor, an external member of the Bank of England's Monetary Policy Committee (MPC) and academic economist, argued on Tuesday that keeping interest rates on hold for a prolonged period is the appropriate policy response to the rise in price pressures triggered by conflict in the Middle East.
Delivering remarks in text to be spoken at an event hosted by Barclays and the Centre for Economic Policy Research, Taylor said the recent geopolitical shock had altered the balance of risks facing monetary policymakers. He described Britain’s economy as "very weak" prior to the outbreak of war and underlined the limited clarity around how the situation will evolve.
"Until we have greater certainty, then, an extended hold at this level is, to me, very much the correct and appropriately measured policy response we need, given the balance of risks," Taylor said.
Taylor, who had been in favour of cutting interest rates before the conflict involving Iran, said he doubted a fresh cycle of wage and price inflation would be set off by current market conditions. He characterised financial market pricing for both interest rates and energy as "benign," suggesting that those market signals did not indicate an imminent, broad-based acceleration in inflationary dynamics.
He also provided a metric for where he saw monetary policy relative to neutral: Taylor reckoned the Bank of England's policy rate - which the central bank held at 3.75% last week - was 0.75 percentage points higher than his estimate of the neutral rate, defined as the level that neither stimulates nor restrains the economy.
While previously advocating for rate reductions in the period before the Iran-related conflict, Taylor emphasised the current lack of certainty about whether peace will hold in the Middle East and how that uncertainty affects the outlook for price pressures and growth. Given that ambiguity, he said maintaining the policy rate at its present level for an extended period aligns with the balance of risks confronting the MPC.
Implications for markets
Taylor's comments point to a cautious stance within the MPC in the short term, shaped by geopolitical developments that are feeding into price dynamics. His assessment that policy is currently above neutral but should be held reflects a calibration driven by uncertainty rather than a clear directional signal to tighten or loosen policy imminently.