A top Bank of England official last night said interest rates may need to be cut as many as six times this year to stave off recession fears as Labour’s jobs tax bites.
Alan Taylor, a member of the Bank’s rate-setting Monetary Policy Committee, said that ‘with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing’.
Inflation worries eased on both sides of the Atlantic yesterday, boosting markets and providing respite to beleaguered Chancellor Rachel Reeves.
Official figures showed UK inflation fell unexpectedly from 2.6 per cent in November to 2.5 per cent in December.
In the US it rose from 2.7 per cent to 2.9 per cent, but underlying measures were weaker than forecast.
Relief: Inflation worries eased on both sides of the Atlantic yesterday, boosting markets and providing respite to beleaguered Chancellor Rachel Reeves
Taylor said Britain was ‘in the last half mile’ on the road to bringing inflation back down its 2 per cent target.
But Britain’s economic growth has been stagnating.
Official figures today are expected to show GDP rose by 0.2 per cent in November after shrinking for two months in a row in September and October.
Taylor said that while he did not expect a recession ‘the risk of this eventuality has clearly been rising’.
He 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.’
Taylor, who was in a minority of three voting for a rate cut in December, said households and businesses were facing a ‘cashflow squeeze’ as National Insurance hikes take their toll and the impact of interest rate hikes over the past few years continue to feed through.
The result was a ‘grinding hand-to-mouth logic’, he told an audience at Leeds University.
He said: ‘In hard times – times of uncertainty or pessimism, when animal spirits are muted, when taking on debt or tapping into a buffer of savings seems just too risky, or infeasible – then incomings will have to match outgoings pretty tightly. Cautious households and businesses will adjust their budgeting.’
Taylor said his ‘baseline’ was for 100 basis points – or one percentage point – of rate cuts this year from 4.75 per cent to 3.75 per cent.
But if the outlook worsens, he said ‘we could then need a more accelerated pace of rate cuts, perhaps 125 or 150 basis points in the coming year’.
That would take Bank rate as low as 3.25 per cent by December – a much faster pace than markets expect.
Bets on rate cuts increased yesterday, with traders now seeing between two and three quarter-point cuts in 2025.
And UK and US inflation figures boosted under-pressure bond markets.
Yields on UK bonds – known as gilts – represent UK borrowing costs. They rise when bond prices fall.
Those yields have soared since the start of the year, sparked at first by fears over the US economy before turning into a general crumbling of confidence in the Labour government.
But yesterday yields on 10-year gilts fell from 4.9 per cent to 4.7 per cent.
The fall in inflation is likely to prove a temporary reprieve with some experts forecasting it could soon climb to 3 per cent.
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