There is a “rising” risk that the UK economy could see a “more forceful downturn” due to higher borrowing costs, a policymaker at the Bank of England has warned.
Alan Taylor, a member of the central bank’s nine-strong Monetary Policy Committee, said there was a small but growing chance that the UK will witness negative growth and “recession dynamics start to kick in”.
It came as the bank rate-setter cautioned that it is “increasingly likely” that the UK economy will fall into a “weakened state for a sustained period” with inflation sliding below target levels.
He said he believes this could lead to “undue damage” to economic activity in the UK.
In a speech at King’s College Cambridge, the rate-setter said he thinks the likelihood of a “soft landing” following the recent uptick in inflation is now receding.
It comes amid a slowdown in economic growth in the UK after strong activity in the first quarter ahead of expected tariff disruption.
The Bank of England has been steadily reducing interest rates over the past year as it seeks to reduce inflation, with the central bank holding rates at 4% in last month’s meeting.
But Mr Taylor is among economists to raise concerns that interest rates still remain too high and could hamper economic growth.
On Tuesday, he said he believes “we may have braked too hard, such that inflation cannot smoothly return to target with the economy close to potential”.
The Bank is seeking to bring inflation down from its latest rate of 3.8% to the target rate of 2% set by the central bank and the Government.
The economist said it is now “increasingly likely” that there is a “bumpy landing” scenario where inflation undershoots the 2% target.
He raised concerns that inflation “goes below target in late 2026, and the economy moves into a weakened state for a sustained period, with output and employment below potential, leading to undue damage to economic activity”.
Meanwhile, he added that there is a worry that fiscal policy could contribute to a third scenario, he describes as a “hard landing”.
“This was a remote and low probability event a year ago, but the risk is rising,” Mr Taylor added.
“In this scenario, weak demand at home can lead to a more forceful downturn, where recession dynamics start to kick in that can be very difficult to contain or even reverse.
“The economy has been flirting with zero growth, and the realisation of negative readings could easily change the future path for the worse. The probability of this outcome is now not trivial.”
