BoE's Taylor warns Bailey about neutral rate issue

The Star

2 days ago

LONDON: Bank of England (BoE) policymaker Alan Taylor says British officials cannot sidestep the question of where interest rates will settle, in a direct challenge to governor Andrew Bailey's approach.
Taylor has been unusually frank about where he expects Britain's neutral rate – the level at which policy is neither stimulating nor weighing on the economy – to end up.
Bailey and those close to him have repeatedly dodged questions on the issue, claiming there is too much uncertainty.
But Taylor, an external rate-setter on the Monetary Policy Committee, warned last Friday that avoiding the question is 'hard, problematic, and in my view, counterproductive', as he repeated his calls for lower rates.
'While one could take a step by step, or meeting by meeting approach to guiding the interest rate, the question of the end point, the final resting place of interest rates, in a steady state can, in my view, never quite be fully sidestepped,' he said in remarks published ahead of a speech at the London School of Economics and Political Science later last Friday.
Taylor said that this end point is of 'enormous interest and consequence to the economy, affecting financial markets, banks, firms, households, everyone'.
It is in sharp contrast to Bailey who frequently bats away questions over the neutral rate, also known by economists as R-star.
Earlier last week, Bailey refused to give his view, saying there is 'huge uncertainty' over its level. He said that judging the restrictiveness of policy at that moment is more important.
In his speech, Taylor – one of the most dovish British rate-setters and a self-declared monetary policy 'activist' – said the BoE should cut rates as a form of 'insurance' against a 'deteriorating' economic backdrop, warning that history suggests it should be done sooner rather than later.
'A better risk management approach at this point is to cut and hold for longer later, rather than hold too much, and have to cut in a hurry later,' he said.
He expects rates to normalise at around 2.75% if a slew of shocks to the economy and prices mostly dissipate.
He said this means that, at 4.25%, there is still a 'long way to go' to get bank rate back to neutral.
'Unlike the period before 2008, it is very hard to simply look at the policy rate itself, take some kind of average or trend, and draw any firm conviction as to where the neutral level might be,' he said.
Financial markets are pricing in two further quarter-point cuts this year, and another two or three more by the middle of next year. — Bloomberg