Impact of Middle East conflict uncertain, Bank of England's Taylor says

By Gwladys Fouche and Yoruk ‌Bahceli

OSLO, March 2 (Reuters) - ​Bank ​of England policymaker Alan Taylor said on Monday that it was too soon to tell how the conflict in the Middle East would impact ‌Britain's sluggish economy.

The U.S.-Israeli war against Iran, which killed the Supreme ⁠Leader, Ayatollah Ali Khamenei, over the weekend expanded on Monday as Iran retaliated and Israel attacked Lebanon. ‌Oil prices surged as much ‌as 13% on Monday, threatening to push up inflation if higher energy costs persist.

Asked how higher energy costs would impact inflation and growth, Taylor told a conference ​hosted by Norway's central bank: "I think it's really too soon to tell".

"That's something we're going to have to keep an eye on as the situation evolves ⁠in real time … the outlook is very fluid."

Financial markets on Monday curbed their bets on rate cuts across central ​banks, reassessing the risk of energy-driven inflation as several Gulf countries shut some of their capacity.

Traders now see less than a 50% ​chance of a BoE rate cut in March, ‌compared to nearly 80% before markets opened on Monday.

For the whole year, they no longer fully price in two rate cuts.

Earlier in ⁠the speech, Taylor reiterated his view that Britain's economy faced growing downside risks and the central bank might soon have to manage a situation where the usual trade-offs between a slowing economy ⁠and inflationary pressures no longer apply.

"I judge that we will soon find ourselves largely outside of trade-off ​territory – and even at risk of entering the familiar realm of deficient demand," Taylor said.

Taylor was part of a four-strong minority on the BoE's Monetary Policy Committee which sought to cut benchmark ‌interest rates to 3.5% from 3.75% last month.

He said at the time he saw a risk of inflation persistently undershooting the BoE's ‌2% target in the future.

He also reiterated his view that U.S. tariffs would be a ⁠source of disinflation for Britain ‌as goods that can't get ​into the United States may get diverted into the country.

(Reporting by Gwladys Fouche and Yoruk Bahceli; additional reporting by Suban Abdulla, editing by ‌Andrei Khalip)

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