Bank of England policymaker Alan Taylor said on Monday that it remains too early to assess the economic consequences for Britain from the intensifying conflict in the Middle East.
Taylor spoke at a conference hosted by Norway’s central bank as a new round of regional violence unfolded. He noted that the U.S.-Israeli war against Iran, which killed the Supreme Leader, Ayatollah Ali Khamenei, over the weekend expanded on Monday as Iran retaliated and Israel attacked Lebanon. The developments sent oil prices sharply higher, with prices surging as much as 13% on Monday - a move Taylor said could feed into inflation if elevated energy costs persist.
Asked directly about the potential impact of higher energy costs on inflation and growth, Taylor responded: "I think it’s really too soon to tell" and added that it was an issue to monitor as events unfolded. "That’s something we’re going to have to keep an eye on as the situation evolves in real time … the outlook is very fluid."
Financial markets reacted to the geopolitical shock by trimming expectations for central bank easing. Traders reduced their odds of a Bank of England interest-rate cut in March to less than 50%, down from nearly 80% before markets opened on Monday. For the full year, market pricing no longer fully reflects two rate cuts.
Taylor cautioned that Britain’s economic picture already carried mounting downside risks. In the earlier portion of his speech he said the central bank may soon confront a scenario where the usual balancing act between slowing growth and inflationary pressure becomes less relevant. "I judge that we will soon find ourselves largely outside of trade-off territory - and even at risk of entering the familiar realm of deficient demand," he said.
Taylor served as one of a four-member minority on the Bank of England’s Monetary Policy Committee that last month sought to reduce the benchmark interest rate to 3.5% from 3.75%. At that time, he warned of a risk that inflation could persistently undershoot the BoE’s 2% target in the future.
He also repeated his prior view that U.S. tariffs could act as a disinflationary force for Britain by diverting goods that cannot enter the United States into the UK market.
Summary
Alan Taylor, a policymaker at the Bank of England, said it is too early to know how the recent escalation in the Middle East will affect the UK economy. The weekend’s expansion of the conflict - described in remarks as a U.S.-Israeli war against Iran that killed the Supreme Leader, Ayatollah Ali Khamenei - led to a sharp oil price spike and prompted markets to pull back on expectations for near-term BoE rate cuts. Taylor reiterated concerns about growing downside risks to growth and the potential for disinflationary pressure over time.