Searching for signposts − speech by Alan Taylor

Alan Taylor's Dow Lecture argues the current energy shock still looks like a relative-price shock, that evidence for significant second-round effects "remains scant," and that policy is already more than sufficiently restrictive. He states plainly that the case for further rate increases is "not compelling" unless energy stays high and second-round effects clearly gain traction, and that once energy risks abate policy will need to move in the other direction. Directionally dovish: it pushes back on pricing of further BoE hikes and frames the next move as a cut, though it is one member's view.

What’s new: Little of the framework is new, but the explicit policy conclusion is: Taylor quantifies the burden of proof for further tightening ("should rest on evidence that second-round effects are actually gaining traction, rather than on the existence of the energy shock alone"), calls the stance "more than sufficient," and points to a lower policy path. The JPMorgan cross-country Taylor-rule evidence, where the UK is the outlier with a falling estimate (4.2% in 4Q25 to 3.5% in 2Q27) and a negative output gap, is the freshest market-facing content because it formalises UK divergence from other central banks.

KEY FINDINGS

• Taylor says the case for further rate increases is not compelling unless energy prices stay high for an extended period and generate clearer signals of transmission into broader inflation persistence. Directly argues against pricing of additional BoE hikes, dovish for the front end.
• He judges the current stance to be more than sufficient and sufficiently restrictive, adding that once energy risks abate policy will need to move in the other direction. Signals an easing bias and pulls forward the expected timing of cuts.
• On JPMorgan's cross-country Taylor-rule comparison he calls the UK the odd one out: its Taylor-rule estimate falls from 4.2% in 4Q25 to 3.5% in 2Q27 rather than rising, with a negative output gap and inflation still above target. Supports BoE easing relative to other central banks and underpins curve steepening versus peers.
• He states that evidence for significant second-round effects remains scant, with sectoral and DMP data showing propagation smaller than 2022 and closer to the 2011 episode. Backs looking through the energy shock rather than tightening into it, supportive for bonds.
• He puts nominal R* at 2.75% to 3% and notes Bank Rate and the OIS curve are substantially restrictive, with market rates beyond two years more restrictive than at the August 2023 final hike when inflation was 6.8%. Frames current policy as amply tight, weakening the case for any hike premium.
• Energy risks into winter are described as two-sided but asymmetric, with limited near-term downside for prices and significant potential for renewed upward pressure; the central scenario is oscillation then modest de-escalation. Leaves a hawkish tail risk alive but not enough to justify tightening now.

FROM THE DOCUMENT

My assessment is that the current stance is more than sufficient to weigh on demand and inflation and provide the degree of restrictiveness needed to return inflation sustainably to target.

Against that backdrop, the case for further rate increases is not compelling to me unless energy prices remain high for an extended period and also generate clearer signals of a transmission into broader inflation persistence, as revealed by the signposts that we are actively monitoring.

However, it does suggest, to me, that the burden of proof for additional tightening should rest on evidence that second-round effects are actually gaining traction, rather than on the existence of the energy shock alone.

Evidence for significant second-round effects remains scant at present.