The Bank of England base rate ought to be cut by 1.25% or 1.5% by the end of the year, according to one Monetary Policy Committee (MPC) member.
Alan Taylor, the most recent addition to the nine-strong committee that votes on what the base rate should be, believes interest rates should drop as soon as possible.
In December last year, the MPC voted in favour of freezing the base rate at 4.75% following a cut from 5% in November.
Taylor opted to vote for the rate cut but was outnumbered by six votes to three, with the Bank of England citing inflation being “slightly higher than expected” as a reason for the hold.
As part of the announcement, the central bank also forecast that by the end of 2024, there would be 0% growth.
Any cuts in 2025 would be gradual, the MPC noted in December, but Taylor – who joined the MPC in September 2024 – has called for a speedier process of cutting the rate, which dictates what lenders have to pay when they borrow money, meaning a drop in interest rates for borrowers and UK households at a faster rate.
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‘Increasingly gloomy outlook for 2025’
In a speech at the University of Leeds, Taylor acknowledged the challenge the rise in National Insurance contributions (NICs) would have on businesses and households, “together with all the other emerging downside economic risks around the world”.
He also told the audience: “The most recent data and forward-looking activity indicators present an increasingly gloomy outlook for 2025. The labour market is near balance, but is still loosening at pace, GDP growth appears to have ground to a halt in the second half of 2024, and with confidence indicators and business expectations veering to the pessimistic, in my view the risks are now more skewed to the downside.
“It is often said (not least by themselves) that central bankers are data-dependent. But data are mostly backward-looking, and sometimes murky. And at possible turning points, we also need to be outlook-dependent, alert to both hard and soft signals, and taking note of sentiment and feedback from surveys and other sources.”
But Taylor added: “Right now, I think it makes sense to cut rates pre-emptively to take out a little insurance against this change in the balance of risks, given that our policy rate is still far above neutral and would still remain very restrictive.
“To reiterate: we are in the last half mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing. It is this logic that convinced me to vote for an interest rate cut in December.”
After worries of a recession were sparked following two months of stagnation in the UK economy, there were more positive signs this week in terms of real gross domestic profit and inflation rates from the Office for National Statistics (ONS).
Inflation surprisingly dipped to 2.5%, while the ONS announced that GDP grew slightly to 0.1% in November 2024.
While Taylor has voted against the grain, he insisted that the committee, which next votes on the base rate decision on 6 February, “will use [its] best judgement to adjust policy as necessary to fulfil our mandate.”
“Our primary task is to return inflation to target in a timely manner and keep inflation expectations anchored. But we also need [to] stay alert to possible trade-offs and the need to avoid undue volatility in output”, he added.
This article was first published on Mortgage Solutions‘ sister site, YourMoney.com. Read: Base rate cuts should be ‘accelerated’ to 3.25%, says BoE official
