Mann's main point in plain English
Catherine Mann argued the BOE can't just let markets tighten things for them. She delivered the remark in London at a Nomura conference on Thursday, arguing the bank will eventually have to take action to reinforce what markets have priced in. "At some point, we need to follow-through with bank rate rises - to maintain credibility, and to avoid policy expectations repricing downwards and inflation expectations repricing further upwards," she said, calling "a risk management strategy to monetary policy" appropriate.
She stressed that some of the higher nominal yields we're seeing may not actually pinch demand. "I cannot take comfort from tighter nominal financial conditions when much of that tightening reflects a higher inflation risk premium and, possibly, a monetary policy uncertainty premium that our own decisions and communications may have contributed to," Mann said. She cautioned that such premia can push up nominal yields yet fail to make real financial conditions - those that drive spending and pricing - meaningfully tighter.
Why markets aren't a substitute for rate rises
By next summer, investors are pricing in up to four BOE rate hikes, reflecting a sharp increase in wagers. Some colleagues on the rate-setting committee have taken reassurance from the repricing in markets since the US-Iran war started, pointing out mortgage rates and other borrowing costs have jumped and may already be cooling demand. Mann pushed back, saying real financial conditions are "insufficiently tight" and policymakers cannot let market moves do the tightening for them.
She also noted the bank's own communications can add to uncertainty premia, complicating the picture. The central bank has projected inflation will top 4% early next year, and while second-round effects from higher energy prices have not yet clearly appeared, Mann said those risks grow the longer the shock continues.
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She made the remarks in London at a Nomura conference on Thursday. Everybody's Business is a weekly podcast that unpacks the questions on your mind about our increasingly confusing economy.
What this means for your money
Mann did not rule out repeated rate rises, saying "it's impossible for us to have the crystal ball that can identify whether or not the environment going forward is a one-and-done, or the start of a cycle." She pointed to wage pressure as a channel for second-round effects: "Inflation will be above the attentiveness threshold of households and firms ahead of wage negotiations next spring," she said.
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