Energy Price Shock May Not Trigger Rate Hike, Bank Policymaker Says

Bank of England policymaker Alan Taylor has downplayed the need for raising interest rates amid increased expectations that a hike is on the horizon. Speaking at the Dow Lecture at the National Institute of Economic and Social Research (Niesr), Taylor said that 'on the evidence so far, higher energy costs still appear largely concentrated within the energy complex itself rather than spreading widely through the economy.'

In other words, the effects of rising energy prices have not yet had a significant impact on the broader economy. Taylor emphasized that policymakers should stay alert to developments in the economy but that the case for an interest rate hike 'should rest on evidence that second-round effects are actually gaining traction, rather than on the existence of the energy shock alone.'

Second-round inflation effects refer to those that happen as a result of higher prices, such as workers demanding wage rises to keep up with living costs or businesses increasing prices because they expect behaviors to change. Some policymakers have said there have been limited signs of second-round effects in the UK economy since inflation has been rising.

Taylor's remarks echo those made by the Bank's Governor, Andrew Bailey, who recently stated that 'there is no question we are seeing the direct effects of the energy shock' but that the pass-through to the wider economy is currently 'subdued.'