MPC member says cheap goods flooding into the UK from China will lower inflation
The Bank of England’s Alan Taylor said trade with China could prompt interest rate cuts(Image: City AM)
An influx of cheap goods from China into the UK could lead to lower inflation and further interest rate cuts by the Bank of England, a member of the bank’s rate-setting Monetary Policy Committee (MPC) has suggested.
Speaking at the National University of Singapore, Alan Taylor, considered to be the most dovish rate-setter on the committee, warned that cheap Chinese goods could reduce inflation over the coming year.
The external MPC member noted that exports no longer reaching the US due to President Trump’s tariff war could potentially be redirected elsewhere. Taylor pointed to evidence indicating an intensification of trade diversion, which he believes could mitigate the “risk of a major decline in world trade”, as reported by City AM.
He said: “I think we are seeing signs of substantial trade diversion into the UK and also into the EU, our main trading partner, with the latter more clearly evident from some of the policy response to import surges in some sectors.” He described the Bank’s forecasts that trade diversion could decrease UK inflation by approximately 0.2 percentage points over the next two years as “conservative”, predicting that headline inflation figures would fall short of the central bank’s projections.
Taylor also suggested that Budget measures on energy subsidies, expected to reduce headline inflation by around 0.5 percentage points this year, could see the inflation rate hit 2 per cent by mid-year rather than next year.
“I see this as sustainable, given cooling wage growth, and I now therefore expect monetary policy to normalise at neutral sooner rather than later, as I said in the December minutes,” he said.
“Interest rates should continue on a downward path, that is if my outlook continues to match up with the data, as it has done over the past year.”
Taylor’s remarks stand in contrast to recent statements issued by the Bank.
In recent meetings, policymakers indicated that global events did not significantly influence their thinking on interest rates following April’s Liberation Day, which triggered heated debates about the potential impact of a worldwide trade war on the UK economy.
His speech coincided with China reporting a larger trade surplus in December than anticipated, with exports of goods rising by 6.6 per cent in dollar terms compared to the previous year. The trade surplus for the world’s second-largest economy now stands at $1.2 trillion (£890m), indicating that China has managed to withstand Trump’s tariffs and identify alternative trading partners for its exports.
Chinese exports to the US fell dramatically, whilst those to the EU increased by 8.4 per cent.
China may yet face additional US tariffs on top of “reciprocal” and fentanyl rates imposed on their goods owing to its substantial trading relationship with Iran. Trump has threatened to levy a 25 per cent tariff on countries that maintain commercial relations with Iran, which could face political turmoil amidst widespread protests against the Ayatollah, the nation’s supreme leader.
