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)
