The Bank of England rate setter has warned that the UK economy may be heading for a “bumpy landing”, but the International Monetary Fund expects the UK to become the world’s second-fastest growing developed economy.
Alan Taylor (pictured), a member of the Bank of England’s monetary policy committee, said weakness in the UK this year and next was increasingly likely.
Taylor, one of the more dovish members of the Monetary Policy Committee, expressed concern that the country would be trapped in a situation where “inflation is below target and will remain below target by the end of 2026, and the economy is sluggish for a sustained period, with output and employment below potential, resulting in excessive damage to economic activity.”
He was speaking at a conference at King’s College, Cambridge.
His comments came after the central bank’s nine-member Monetary Policy Committee voted 7-2 earlier last month. Keep bank interest rates unchanged at 4%Taylor and Swati Dhingra pushed to cut interest rates by a quarter of a percentage point to 3.75%.
The central bank expects the cost of living, currently at 3.8%, to rise to 4% this month before falling back to its 2% target by mid-2027.
Money markets don’t expect another rate cut at the Monetary Policy Committee’s remaining two meetings this year.
In his speech, Taylor added that the UK may find itself on the verge of ending the “double diversion phenomenon” as US President Donald Trump’s tariff war changes trade flows.
The external member of the Monetary Policy Committee said: “First, the United States imposes import barriers on low-cost producers, who then move their goods to third countries such as the EU, which in turn imposes further barriers on these low-cost producers, who then redirect large quantities of their exports to increasingly smaller target groups in open export markets.
“Certainly the UK is one of those potential targets.”
However, Taylor spoke as the International Monetary Fund predicted Britain would be the second-fastest growing economy in the Group of Seven, after Britain, but have the highest inflation rate.
The report was released ahead of Chancellor Rachel Reeves’ Budget on 26 November.
The agency said Britain’s economy would grow by 1.3% this year, 0.2% higher than its April forecast, thanks to “strong economic activity in the first half of 2025” and a favorable UK-US trade deal announced in May.
The agency expects growth to remain at 1.3% next year, down 0.1% from its April forecast.
It forecast inflation to average 3.4% this year and 2.5% in 2026, “partly due to changes in regulatory prices”.
But it added: “This is expected to be temporary, with labor market easing and slower wage growth ultimately helping inflation return to target by the end of 2026.”
Lindsay James, investment strategist at Quilter, said the report was “unwelcome for the Treasury ahead of the crucial Budget in just over a month’s time”.
James added: “While persistently higher inflation has the potential to alter consumer spending patterns and create a wage-price spiral, today’s latest jobs report shows that wage inflation has changed little in recent months, with average weekly earnings excluding bonuses between June and August 4.7% higher than the same period last year and only slightly down from 4.8% in the three months to July.
“Inherent worker shortages in many areas of the economy, combined with demographic challenges, appear likely to keep wage inflation relatively persistent.”
The German chancellor noted that this was “the second consecutive time the International Monetary Fund has raised its growth forecast for this year.”
Reeves added: “Not surprisingly, the UK’s economic growth in the first half of the year was ahead of the G7, with average disposable income rising by £800 since the election.
“But know that this is just the beginning. For too many people, our economy feels trapped. Working-class people are feeling it every day, the experts are talking about it, and I’m going to deal with it.”
