The long-serving Taylor played a major role in helping Blues regain their Barclays Premier League status at the first attempt last season.
But the 37-year-old's place is under severe threat after Hart formally completed his temporary move to St Andrews this morning.
Taylor said: "Joe Hart's name has been linked with Birmingham in the papers for a while and I have not had a problem with that.
"The gaffer (Alex McLeish) is trying to strengthen the squad in every position.
"I will work hard when pre-season gets under way and am more than happy to fight for my place."
Hart's move to Birmingham followed the arrival at Eastlands yesterday of former Aston Villa goalkeeper Stuart Taylor on a one-year deal as cover for Shay Given.
Hart is aware of the need to play regular first team football to have a chance of being part of the England squad for the 2010 World Cup finals in South Africa.
The 22-year-old is currently part of the England Under-21 squad bidding for European Championship glory in Sweden.
He was given an extended run under Sven-Goran Eriksson as the Manchester City number one but Given's arrival from Newcastle in January resulted in him losing his place.
Hart admitted that had left him frustrated after he had been given a taste of regular football in the top flight.
"It has been tough. It's frustrating, but there's only one person can play in goal and Shay's doing that at the moment," Hart told Manchester City's official website. "I've had to deal with it the best I can. It's not been ideal, but it's not the end of the
The former Shrewsbury stopper has made 33 starts for City and showed great potential, something boss Mark Hughes now hopes he can build on with another season's experience.
"I have always said that Joe is a really good young keeper, and his talent was obvious to (goalkeeping coach) Kevin Hitchcock and I from the outset," Hughes said.
"His contribution to the team prior to Shay Given's arrival was fantastic, but by loaning him to Birmingham, he will add invaluable experience to that already gained here at City.
"I know he will relish the prospect of regular Premier League action, which is vital at this stage in his career."
Having sealed his signature, Birmingham are also optimistic of tying up a deal for Cardiff central defender Roger Johnson after making an improved £5 million offer.
It is believed the new offer involves Birmingham paying more of the fee upfront for the 26-year-old.
McLeish is aware to revamp his back four with the arrival already from Coventry of Scott Dann for £3.5 million while Geovanny Espinoza's £400,000 move from Sporting Club Barcelona is also close to being finalised after undergoing a medical.
The 32-year-old will then undergo a short holiday break before reporting back for pre-season training on July 8.