By Paul Hannon
The U.K.'s annual rate of inflation is likely to fall to the Bank of England's 2% target by the middle of this year, aided by cheap imports from China and allowing for further cuts in borrowing costs, rate-setter Alan Taylor said Wednesday.
The Columbia University economics professor said there are signs that Chinese businesses facing high tariffs in the U.S. have sought and found new customers in the U.K. and other parts of Europe by lowering their prices.
Taylor said that is one factor that will press down on the inflation rate, in addition to measures announced in the government's budget that are expected to lower household energy prices.
"We can now see inflation at target in mid-2026, rather than having to wait until 2027 as in our previous projection," he said in a speech. "I see this as sustainable, given cooling wage growth, and I now therefore expect monetary policy to normalize at neutral sooner rather than later."
Figures released Wednesday showed China's trade surplus, the difference between its exports and imports, reached a record in 2025 at $1.19 trillion.
Shipments to the U.S. fell in response to higher tariffs, but Chinese manufacturers found new customers in the rest of the world.
"Exports that can no longer go to the U.S. from China may now flow to other places, and the current data suggest this is indeed starting to happen," Taylor said. "This would be a case of trade diversion."
The rate-setter said diversion could lower the U.K.'s inflation rate in 2026 by more than the 0.2 percentage points estimated by the BOE's economists.
"This is a baseline figure, and arguably quite conservative," he said. "My judgment of the volumes and elasticities is a bit higher than this."
U.K. inflation rebounded last year, but largely as a result of increases in prices set by the government, rather than strong demand.
As recently as November, the BOE had expected inflation would return to its target only in 2027. However, the pace of price rises has slowed more rapidly than expected from its September peak, and the BOE's economists now expect the inflation rate to be close to the 2% target in April, when cuts in household energy prices are due to take effect.
Taylor's comments suggest he will again vote for a cut in the key rate when the BOE's nine rate setters next meet in early February.
The Columbia economist has argued for faster reductions in the key rate than many of his colleagues. In December, four voted against the decision to lower the key rate to 3.75% from 4%.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
January 14, 2026 03:36 ET (08:36 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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