BoE’s Taylor says prolonged energy shock could cement case for hikes

Bank of England (BoE) Monetary Policy Committee member Alan Taylor said on Tuesday that “monetary policy should not react mechanically to movements in energy prices,” though he recognized that if “pressure builds and second round effects” emerge, then the BoE should reassess monetary policy.

At the last BoE meeting, Taylor voted to hold rates unchanged, as the majority kept rates at 3.75%. Taylor added that a case for rate increases would be cemented if “energy prices remain high for an extended period.”

Key highlights:

The right policy response is vigilant but disciplined.

Monetary policy should not react mechanically to movements in energy prices if those movements remain primarily relative-price shocks.

If pressure builds and second-round effects begin to gain traction, the policy assessment would have to change.

At some point, once energy risks abate, policy will need to move in the other direction.

The burden of proof for additional tightening should rest on evidence that second-round effects are actually gaining traction.

The case for further rate increases is not compelling to me unless energy prices remain high for an extended period and also generate clearer signals of a transmission into broader inflation persistence.

The economy is proving less susceptible, at least so far, to a repeat of the inflation dynamics seen in 2022.

There is a non-trivial risk to inflation.

Evidence points against a general inflation shock.

The current policy stance is restrictive enough.