Bank of England official: Risks of a recession in the UK are rising, only need to consider raising interest rates in the most pessimistic scenario of the situation in Iran.

Alan Taylor, a member of the Monetary Policy Committee of the Bank of England, said that the UK only truly needs to raise interest rates in the most pessimistic scenario regarding the situation in Iran. At the same time, he warned that the conflict in the Middle East is increasing the risk of the UK economy falling into recession. On Thursday, Taylor stated that if the energy price shock does not trigger a more serious "second round inflationary effect", the current high interest rates maintained by the Bank of England may be enough to control inflation. He pointed out that the UK labor market is currently weak, suppressing price pressures, so the risk of a "wage-inflation spiral" similar to 2022 is relatively low. Taylor said, "The UK economy is currently very weak and is facing inflationary supply shocks, which puts us in a very complex balancing act. Given that current monetary policy is already quite restrictive, we do not need to react overly aggressively." At the April meeting, Taylor and eight other officials voted to keep interest rates unchanged, with only one member voting to lower them. As one of the most dovish officials within the Bank of England, Taylor believes that the current level of 3.75% interest rates is restrictive enough. He noted that this level is significantly higher than his estimate of around 3% for the "neutral interest rate." Taylor also stated that given the recent tightening of the financial environment, real interest rates in the UK are about 100 basis points higher than the neutral rate. It is worth noting that before the Middle East conflict caused energy prices to soar, Taylor had always advocated for the Bank of England to cut rates faster. Currently, the Bank of England is facing a dilemma, where on one hand, the conflict in the Middle East could bring new inflationary shocks, and on the other hand, domestic demand in the UK is clearly weak. Data released on Thursday showed that private sector activity in the UK contracted for the first time in over a year, while inflation data was lower than expected, and the labor market continued to be weak. Analysts believe that these data may strengthen the position of the "wait and see" faction within the Bank of England. At the April meeting, the Bank of England even abandoned the traditional single forecast model and instead adopted three different scenario analyses of the trends in energy prices and inflation. Among them, the most pessimistic scenario shows that the UK inflation rate could rise to 6.2% by early 2027 and remain above the Bank of England's 2% target throughout the forecast period. However, Taylor believes that there is currently not enough evidence to suggest that the UK is heading towards this worst-case scenario. He stated that the more serious second-round inflationary effect may gradually emerge later this year and may have a more noticeable impact on inflation in 2027. In the short term, he will focus on corporate pricing power and the progress of the situation in the Middle East. Taylor also warned that the war in Iran has significantly increased the risk of economic recession in the UK. He estimated that the probability of the UK falling into recession is currently as high as 40%, compared to around 20% before the conflict broke out. He emphasized that whether the more serious results actually occur will largely depend on the duration of the war in Iran and its impact on global energy supply. Taylor said, "If a peace agreement cannot be reached and the war lasts for weeks or even months, the likelihood of a second-round inflationary effect occurring will increase."