Bank should not rush into hiking rates in face of Iran war, says MPC member

Bank of England rate-setter Alan Taylor has said policymakers should not rush into raising borrowing costs in the face of the Iran war energy price shock, but said “all hands on deck” would be needed to navigate the current crisis.

In a speech in New York, Mr Taylor reiterated that he sees a “high bar” to increasing interest rates in response to the current surge in global oil and gas prices caused by the Iran war.

He said: “Monetary policy is not well suited to address sudden energy shocks, which are unpredictable and outside policymakers’ control.

“Intervention is only warranted if a large shock threatens to destabilise inflation expectations; otherwise, policy should focus on medium-term inflation targets.”

The Bank’s nine-strong Monetary Policy Committee (MPC) voted unanimously earlier this month to hold rates at 3.75% but signalled it was ready to raise borrowing costs should war in the Middle East keep energy prices elevated.

It warned that inflation was now set to reach up to 3.5% by the third quarter – well above its 2% target.

While the Bank said it “stood ready to act”, Mr Taylor suggested he would not be in a rush to raise rates.

He said: “If disruptions persist and the shock grows, the MPC will face a tougher choice between high inflation and weaker growth.

“The rate path will depend on the trade-off.

“Given massive uncertainty around future energy prices, and our starting point, I currently see a high bar to hiking.

“Holding policy steady is preferable until the impact becomes clearer.”

The Bank had been expected to cut rates before the conflict began on February 28, but financial markets are now pricing in two or more hikes by the end of the year due to the rising inflation outlook.

The Bank will next decide on rates on April 30, when it will also have its latest quarterly economic forecasts to hand.

Mr Taylor said: “Our latest decision should not be seen as a shift in direction; the current circumstances suggest that little change is needed at this stage.

“The UK faces low risks of inflation becoming unanchored, with a small shock thus far (in the grand scheme of things), a weakening labour market, and slowing wage growth.”

He said the “growth-inflation trade-off” has become more acute, “complicating matters further” and stressed the current situation would require a “full effort” from policymakers.

Mr Taylor added: “Geopolitical and energy price shocks, which have been the biggest threat to price and macroeconomic stability in the past, now once again continue to pose risks that are largely outside the control of monetary policy.

“Navigating these challenges in the current moment will require full effort and all hands on deck; it will take the full depths of our intellectual rigour and analytical capacity; it will demand attention to difficult trade-offs, policy flexibility, and clear communication.”

Earlier this week, the Bank’s chief economist Huw Pill signalled he would be prepared to vote for a rate hike soon if needed to control inflation.

He said policymakers should not use the “fog of uncertainty” as an “excuse” not to act to combat inflation risks.