Global Market: BoE's Taylor says energy prices alone do not justify rate hike

The case for further Bank of England interest rate increases remains weak unless elevated energy prices begin to generate clearer signs of persistent inflation across the wider economy, Monetary Policy Committee member Alan Taylor said on Tuesday, according to a report by Reuters.

Taylor said the recent rise in oil and gas prices could push Britain's headline inflation rate significantly higher over the winter. However, he argued that an increase in energy costs alone would not warrant tighter monetary policy, particularly in the absence of stronger evidence that inflation was spreading into other parts of the economy.

Taylor pointed to limited evidence of so-called second-round inflation effects, with food-price growth running below expectations and underlying wage growth still broadly consistent with the Bank of England's 2% inflation target.


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BoE Keeps Rates on Hold

Taylor was among the six MPC members who voted earlier this month to keep the Bank Rate unchanged at 3.75%, while three members backed a 25-basis-point increase. His comments suggest that he currently requires a relatively high threshold of evidence before supporting another rate increase.

According to Reuters, Taylor wants to see clearer indications that higher energy costs are feeding into wages, services and other areas of the economy before backing tighter policy.

The Bank of England has warned that inflation could rise above 4% early next year, compared with 3.1% in August. UK inflation has remained above the central bank's 2% target for most of the past five years.

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Current Inflation Shock Differs From 2022

Taylor also distinguished the current inflation outlook from the surge seen in 2022 following Russia's invasion of Ukraine.

That earlier shock coincided with a tight post-pandemic labour market and contributed to inflation rising into double digits. Taylor said the current environment does not yet show the same degree of broad-based inflationary pressure.

Inflation in several energy-intensive goods and services categories has not accelerated as much as might have been expected following the latest energy-price shock.

Wage Data in Focus

Wage growth will remain an important indicator for policymakers as they assess whether higher energy costs are becoming embedded in inflation.

Taylor has highlighted the Bank of England's upcoming survey of companies' wage intentions for 2027 as a particularly important data point. Preliminary findings are expected to be available around the December policy meeting, while the full survey is due in January.

Taylor would be reassured if wage expectations remained at or below the previous survey's level of slightly above 3%, suggesting that policymakers will closely monitor wage settlements for signs of persistent inflation.

Policy Outlook Remains Divided

Taylor's cautious stance comes as other Bank of England policymakers have indicated greater concern about the inflation outlook.

Deputy Governor Sarah Breeden recently said it was becoming increasingly appropriate for interest rates to respond to rising inflation risks if elevated energy prices persisted. Deputy Governor Clare Lombardelli has also indicated that rates may need to rise if energy costs remain high unless there is clear evidence of economic weakness.

The divergence highlights the uncertainty facing the MPC as it weighs the risk that higher energy prices could become embedded in domestic inflation against signs of weaker demand and labour-market conditions.

For financial markets, the key indicators in coming months are likely to include energy prices, wage settlements, services inflation and evidence of broader price pressures. A sustained increase in those measures could strengthen the case for tighter policy, while limited pass-through from energy costs could support the case for keeping rates unchanged.

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