Alan Taylor, a member of the Bank of England’s Monetary Policy Committee, is sounding an alarm that most central bankers prefer to whisper about: the UK economy is weak, supply shocks are stoking inflation, and monetary policy is too tight to help with either problem.
Taylor’s assessment boils down to a painful squeeze. The economy lacks demand, but inflationary pressures from energy prices and trade disruptions make it politically awkward to cut rates aggressively. The result is a policy rate that Taylor believes is roughly 100 basis points above where it should be.
The numbers behind the warning
The current Bank Rate stands at 4.25%. Taylor pegs the neutral rate, the theoretical level that neither stimulates nor restricts economic activity, at around 2.75%. In English: the BoE is applying the brakes on an economy that’s already struggling to accelerate.
Here’s the thing. Inflation has actually been coming in weaker than the BoE’s own forecasts. Wage growth has followed the same pattern, undershooting expectations. Meanwhile, unemployment is running higher than anticipated.
