Bank of England’s policymaker warns neutral rate question can’t be avoided

[LONDON] Bank of England (BOE) policymaker Alan Taylor said UK officials cannot sidestep the question of where interest rates will settle, in a direct challenge to governor Andrew Bailey’s approach.

Taylor has been unusually frank about where he expects the UK’s neutral rate, the level at which policy is neither stimulating nor weighing on the economy, to end up. Bailey and those close to the governor have repeatedly dodged questions on the issue, claiming there is too much uncertainty.

But Taylor, an external rate-setter on the Monetary Policy Committee, warned on Friday (Jul 4) that avoiding the question is “hard, problematic, and in my view, counterproductive,” as he repeated his calls for lower rates.

“Whilst one could take a step by step, or meeting by meeting approach to guiding the interest rate, the question of the end point, the final resting place of interest rates, in a steady state can, in my view, never quite be fully sidestepped,” he said in remarks published ahead of a speech at the London School of Economics and Political Science later on Friday.

It is in sharp contrast to Bailey who frequently bats away questions over the neutral rate, also known by economists as R-star. Earlier this week, Bailey refused to give his view, saying there is “huge uncertainty” over its level. He said that judging the restrictiveness of policy at that moment is more important.

In a question-and-answer session following the speech, he said policymakers cannot be “afraid of our own shadow”, adding they should also publish their own paths for rates. He hailed the model of Sweden’s Riksbank as showing “full transparency” by publishing a rates forecast.

“I think we are well served if we publish that and we have got a committee. We have a range of views and it would be good for everyone to see that range,” he said. “We shouldn’t be afraid to put our views out there because I think that contributes to public understanding, understanding in the financial markets.”

In his speech, Taylor said that this end point for interest rates is of “enormous interest and consequence to the economy, affecting financial markets, banks, firms, households, everyone”.

Taylor – one of the most dovish UK rate-setters and a self-declared monetary policy “activist” – said the BOE should cut rates as a form of “insurance” against a “deteriorating” economic backdrop, warning that history suggests it should be done sooner rather than later.

“A better risk management approach at this point is to cut and hold for longer later, rather than hold too much, and have to cut in a hurry later,” he said.

He expects rates to normalise at around 2.75 per cent if a slew of shocks to the economy and prices mostly dissipate. He said this means that, at 4.25 per cent, there is still a “long way to go” to get the bank rate back to neutral.

“Unlike the period before 2008, it is very hard to simply look at the policy rate itself, take some kind of average or trend, and draw any firm conviction as to where the neutral level might be,” he said.

Financial markets are pricing in two further quarter-point cuts this year, and another two or three more by the middle of 2026.

With the labour market continuing to slacken, the risk of taking a gradual approach implied by the market path, Taylor said, is that inflation undershoots the 2 per cent target and the economy experiences a hard landing.

“In the near term, I see stronger disinflationary forces building up over the rest of this year, and then in the medium term I see a need to reach for a lower neutral level over the course of 2026 and 2027 should we be able to normalise smoothly,” he said.

“For those two reasons, I was persuaded to not only vote for a lower level of Bank Rate now but also to signal the need to be on a lower path over the year to come.” BLOOMBERG