Bank of England rate-setter issues verdict on whether interest rates will be hiked next month

‘I currently see a high bar to hiking’

The Bank of England’s policymaker has issued a firm warning against rushing into interest rate hikes as a reaction to the energy price shock brought about by the Iran war.

Speaking in New York this week, rate-setter Alan Taylor argued that the central bank must maintain a high bar for increasing borrowing costs despite the significant spike triggered by the conflict in the Middle East.

The Monetary Policy Committee member emphasised that monetary policy is fundamentally ill-suited to address sudden, unpredictable surges in global oil and gas prices that remain entirely outside the control of domestic officials.

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While the Bank’s nine-member committee recently voted unanimously to hold interest rates at 3.75%, the geopolitical landscape has shifted dramatically since the conflict began on February 28.

This has forced a pivot from previous expectations of rate cuts to a market now pricing in multiple hikes by the end of the year.

This change comes as the bank warns that inflation is now projected to climb as high as 3.5% by the third quarter, a figure that significantly overshoots its 2% target.

Despite this inflationary pressure, Mr Taylor suggested that holding policy steady remains the preferable course of action until the full economic impact of the Middle East conflict becomes clearer. He noted that the UK currently faces a relatively low risk of inflation expectations becoming unanchored, pointing to a weakening labour market and slowing wage growth as factors that provide the MPC with some breathing room.

According to Mr Taylor, the primary role of the Bank in this “all hands on deck” moment is to navigate an increasingly acute trade-off between fighting high inflation and supporting weakening economic growth.

However, Mr Taylor’s cautious stance highlights a growing divide within the Bank of England’s leadership regarding how to handle the “growth-inflation trade-off” during wartime. His preference for patience stands in contrast to recent comments from Chief Economist Huw Pill, who signaled a readiness to vote for a rate hike sooner rather than later to curb rising price risks.

Pill has argued that the “fog of uncertainty” surrounding the war should not serve as an excuse for policy inaction, suggesting that the Bank must be proactive to ensure inflation does not become a permanent fixture of the UK economy.

With the next rate decision and a fresh set of economic forecasts scheduled for April 30, the committee remains tasked with applying deep analytical rigor to a crisis that Taylor admits will demand extreme policy flexibility and clear communication to the public.