newsio aggregates and links to original sources. We do not own the original images or content. If you believe content infringes on intellectual property rights, contact us — it will be removed at first notice.
business/news//The Sunday Times
Alan Taylor, an external member of the Bank’s nine-strong monetary policy committee, said that the worst of the possible scenarios for the war in Iran was “likely correct” This lifts the probability of a recession over the next year to as much as 40 per cent
Bank of England's worst-case Iran war scenario predicts oil above $100 and recession risk at 40%.
KEY POINTS
Inflation could peak above 6% this year and only return to target by 2028.
Interest rates might be raised to 5.25% if oil prices remain elevated.
Financial markets have shifted expectations from two rate cuts to two rate hikes for 2024.
Interest rates are currently 0.5 percentage points higher due to the war's impact on oil and raw material costs.
The risk of the UK entering a recession is rising as higher oil prices fuel inflation, potentially forcing the Bank of England to raise interest rates this year, a Bank of England policymaker warned.
Alan Taylor, an external member of the Bank’s nine-strong monetary policy committee, said that the worst of the central bank’s possible scenarios for the war in Iran, where oil prices remain above $100 for the rest of the year, was “likely correct”.
This lifts the probability of a recession over the next year to as much as 40 per cent and would require monetary tightening. In the Bank’s worst-case scenario for energy prices published last month, inflation would hit a peak above 6 per cent by the end of the year and not return to the 2 per cent target until 2028.
In this environment, the Bank would be forced to raise interest rates to as high as 5.25 per cent, a degree of monetary restriction that “raises the risk of a recession”, the Bank said in April.
Taylor had been one of the biggest supporters of interest rate cuts before the US-Iran war broke out in February. The Bank has kept its benchmark interest rate unchanged at 3.75 per cent since the conflict and said it wanted to wait to see how the impact of the war impacts inflation and the labour market.
Taylor said the risk that higher oil prices translate into higher wages and costs throughout the economy was smaller than during the Ukraine-Russia war in 2022. “Economic conditions are such right now that second-round effects are less likely to materialise than they did in 2022, but it’s an uncertain situation,” he told an event hosted by MNI, a financial news service.
Traders had expected the Bank to cut interest rates two times this year but since the war have reversed their bets in favour of two rate rises to take the base rate to 4.25 per cent to manage inflation.
This has caused government bond yields to rise, tightening financial conditions and imposing a disinflationary force on the economy. “We think at the moment, with the tightening of financial conditions, there is enough restrictiveness in the system to keep a lid on inflationary pressures sufficiently for now,” Taylor said.
Andrew Wishart, economist at Berenberg, said: “By pricing in rate hikes, investors have made it less likely that central banks have to deliver all of them.”
Taylor said interest rates were 0.5 percentage points higher than they would have been in the absence of the war, which has raised the cost of oil and related goods like fertiliser, helium, and other raw materials.
Annual inflation fell more than expected to 2.8 per cent in April, and the Bank would be keeping a close eye on how far firms passed on their energy costs to consumers, he said.