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The Bank of England’s Taylor stated that current interest rates are far from neutral, citing a neutral range of 2.75% to 3%. Business confidence in the UK is eroding, as shown in REC and PMI surveys, with caution and concern prevailing.
Taylor noted that the tariff shock was unexpectedly large, with uncertain future economic activity. Wage settlement data aligns with slower wage growth expectations, while BOE’s central forecast is criticised for underestimating the global trade situation.
Recent Rate Cut
Recently, the Bank of England cut its base interest rate by 0.25 percentage points to 4.25%, marking the fourth reduction since August 2024. This decision followed easing inflationary pressures and global economic uncertainties, including new U.S. tariffs.
The Monetary Policy Committee’s vote was divided. Five members supported the cut, while Taylor and another member proposed a larger reduction due to subdued inflation and global trade concerns. Catherine L. Mann and Huw Pill opposed any rate change, citing ongoing inflation pressures from wages and services, reflecting differing views on managing inflation and economic growth risks.
In March, inflation was 2.6%, with a predicted rise to 3.5% by the third quarter due to increased energy prices, before stabilising at 2% by early 2027. U.S. tariff increases contribute to a cautious UK economic outlook.
What the original content lays out is fairly straight. It tells us that Taylor, a policymaker at the Bank of England, is not convinced the current interest rate of 4.25% sits within the so-called neutral zone, which is pegged between 2.75% and 3%. A neutral rate is that sweet spot which neither spurs nor slows the economy. If the rate is indeed above neutral, which Taylor believes it is, then monetary policy is still acting as a brake on economic output.
Impact of Global Factors
He also pointed to a sharp and surprising impact from U.S. tariffs, which are starting to expose vulnerabilities in global trade flows. This, alongside slumping UK business sentiment seen in recent surveys, paints a sourer picture. There are hints of stalling momentum on the domestic side—caution from firms, slower hiring intentions, rising costs in services, and tentative consumer demand.
What’s also worth noting is the visible gap in perspectives at the Bank itself. While a slim majority opted for a minor cut in rates, two members pushed for a bolder move, arguing that the economy is already under enough pressure and won’t benefit from an overly gentle approach. On the flip side, others argued the risk of inflation stubbornly sticking around is still too high, especially in the services sector and wage growth figures.
