BoE’s Taylor: Become more reassured that we are proceeding towards inflation normalisation

BoE’s Taylor voted to cut the Bank Rate by 25 bps at the last policy meeting because of “substantial forecast revision” to inflation and high-frequency indicators seeing inflation returning to target this year. He expected inflation expectations to moderate significantly due to easing inflation, softer price-wage dynamics and emerging slack. He added that he now places even more weight on the central and downside scenarios. He expects to reach the 3% neutral rate earlier than anticipated.

As a reminder, the BoE surprised with a dovish hold at the last meeting as 4 members dissented for a rate cut versus 2 expected. Moreover, they changed the guidance in the statement from “the bank rate is likely to continue on a gradual downward path” to “the bank rate is likely to be reduced further”. Inflation forecasts were also revised substantially lower.

Last week, the probabilities for a rate cut in March increased to 75% following the much weaker than expected UK labour market report on Tuesday and mostly benign UK CPI data on Wednesday.