Alan Taylor, the external member of the Monetary Policy Committee who has emerged as one of its most influential voices, has used a major speech to argue that the Bank of England should be more willing to cut interest rates when the data supports it, and less constrained by the fear that inflation might prove stubborn.
In a speech titled "Central Reservations," Taylor argued that the MPC had been too slow to recognise the improvement in the inflation outlook and that the balance of risks had shifted from inflation being too high to growth being too low. He said the committee should be prepared to act pre-emptively, rather than waiting for conclusive evidence that inflation was sustainably at target before beginning to reduce rates.
Taylor's speech was significant because it came from a committee member who is widely respected for his analytical rigour and who is not associated with either the hawkish or dovish faction on the committee. His argument that the risks had shifted was based on a detailed analysis of the labour market, which he said was softening more rapidly than the headline employment data suggested, and of inflation expectations, which he said were firmly anchored.
The speech was interpreted by financial markets as increasing the probability of a rate cut at the MPC's August meeting. Taylor is one of two committee members who voted for a cut at the June meeting, and his speech suggests that he will continue to argue for earlier and faster easing than the majority of the committee currently supports.
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