Cheap goods flooding into the UK from China will lower inflation and prompt the Bank of England to cut interest rates further, a member of the Monetary Policy Committee has said.
Alan Taylor, considered to be the most dovish rate-setter on the MPC, warned that cheap goods flowing in from China would lower inflation over the upcoming year.
In a speech at the National University of Singapore, the external member on the MPC said exports no longer arriving in the US due to President Trump’s tariff war could “now flow to other places”.
He said there was evidence to suggest trade diversion was intensifying, adding that it would lessen the “risk of a major decline in world trade”.
“I think we are seeing signs of substantial trade diversion into the UK and also into the EU, our main trading partner, with the latter more clearly evident from some of the policy response to import surges in some sectors,” Taylor said.
He said forecasts by the Bank that trade diversion could lower UK inflation by some 0.2 percentage points over the next two years were “conservative” estimates as he said he expected headline inflation figures to undershoot predictions set out by the central bank.
He added that, with Budget measures on energy subsidies set to lower headline inflation by some 0.5 percentage points this year, the inflation rate could reach 2 per cent by the middle of this year rather than next year.
“I see this as sustainable, given cooling wage growth, and I now therefore expect monetary policy to normalise at neutral sooner rather than later, as I said in the December minutes.
“Interest rates should continue on a downward path, that is if my outlook continues to match up with the data, as it has done over the past year.”
Interest rate debates intensify
Taylor’s comments contrast recent statements made by the Bank.
In recent meetings, policymakers have said world events did not weigh heavily on their thinking around interest rates after April’s Liberation Day sparked intense debates about the impact of a global trade war on the UK economy.
His speech came as China reported a higher trade surplus in December than previously, with exports in goods growing by 6.6 per cent in dollar terms compared to the year before.
The trade surplus for the world’s second largest economy now stands at $1.2 trillion (£890m), suggesting that China has been able to defy Trump’s tariffs and find other trading partners to export goods to.
Chinese exports to the US radically dropped while those to the EU rose 8.4 per cent.
China could yet face more tariffs on top of “reciprocal” and fentanyl rates set on their goods due to its major trading relationship with Iran.
Trump has threatened to impose a 25 per cent tariff on countries that share commercial ties with Iran, which could experience political upheaval in the face of mass protests against the Ayatollah, the country’s supreme leader.