By Paul Hannon
The Bank of England might be able to contain the inflationary pressures triggered by the conflict in the Middle East without raising its key interest rate, a member of its Monetary Policy Committee said Thursday.
The BOE left its key interest rate at 3.75% last month. It expects the inflation rate to pick up over coming months as energy costs rise.
However, Alan Taylor said, with the key rate still high enough to restrain economic activity, leaving borrowing costs at their current level might be sufficient to prevent second-round effects.
"An extended hold would probably be enough restrictiveness to deal with the situation," Taylor said in a webinar hosted by MNI.
Taylor has tended to favor a lower key interest rate than his colleagues on the MPC. The U.K. rate setter estimates that the interest rate at which the BOE is neither stimulating nor restraining the economy is 3%.
However, he said under a severe scenario in which oil prices rise to $130 a barrel and stay there for a number of months, the second-round effects would be stronger and a rate rise might become necessary.
Before the conflict began in late February, investors had expected the BOE to cut its key interest rate by half of a percentage point in two moves this year. They now expect to see an increase of similar size.
The change in investor expectations about the BOE's rate path has led to a sharp rise in yields on U.K. government bonds. That in turn has raised the cost of borrowing for households and businesses, and is already acting as a restraint on the economy that should help cool inflation.
Taylor said those moves have added to the restrictiveness of the BOE's monetary policy.
"We have seen a tightening in financial conditions, and that will be important for what we do next," he said.
In testimony to lawmakers Wednesday, BOE Gov. Andrew Bailey and other members of the MPC also pointed to moves in financial markets as likely to weigh on the economy and remove the need for an urgent response to the rise in energy costs.
Collectively, their comments suggest the BOE is unlikely to raise its key interest rate at its June meeting.
Recent data has pointed to a continued cooling in the U.K. jobs market, while surveys of purchasing managers released Thursday indicated the economy has slowed sharply after a strong start to the year.
"We have a very weak economy being hit by an inflationary supply shock," Taylor said.
The annual rate of inflation fell in April, and to a level that was below expectations. But Taylor said he would not place much weight on that data.
"I'm happy to see that number surprise on the downside," he said. "That's just one reading. I'd like to see how it plays out."
Indeed, the Columbia University economics professor said that what really matters for future rate decisions is the condition of the Strait of Hormuz. It has largely been closed since the start of the war, but usually accounts for the transit of about a fifth of the world's oil and natural gas supplies.
"Monetary policy is driven by geopolitics right now," he said. "If the Strait is still closed a month from now, that's not good."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
05-21-26 0949ET
