Bank of England rate-setter Catherine Mann says the central bank mishandled its first response to the Iran war shock, pushing UK borrowing costs higher through an inflation risk premium rather than genuine policy tightening. Her view clashes with Governor Andrew Bailey's, who sees the same rise in market rates as having bought the BoE time.
Mann says March response sent the wrong signal
Bank of England policymaker Catherine Mann said on Thursday that the BoE's initial response in March to the Iran war contained errors that are still distorting UK borrowing costs. The BoE held interest rates at the time, and investors read that stance as "wait mode" rather than decisive action against inflation, she said.
As a result, Mann argued, higher rates paid by households, businesses and the government may simply reflect expectations of higher inflation rather than policy that actually slows future price growth. She traced the pressure to a risk premium built up since March, not to effective tightening.
A split with Bailey over what tighter conditions mean
Some Monetary Policy Committee members think the rise in market rates since the Iran shock is helping bear down on inflation. Mann disagrees, saying it instead reflects higher inflation expectations and possibly a monetary policy uncertainty premium. Her position stands at odds with that of Governor Andrew Bailey and others on the MPC, who have said the rise in market borrowing costs bought the BoE time before deciding whether to raise rates itself.
Mann said in a speech at the Nomura London Macro Forum: "In my view, real financial conditions are insufficiently tight,"
She voted last month to raise the Bank Rate to 4% from 3.75%, against a majority that chose to hold. Her comments echoed BoE Chief Economist Huw Pill, who has also criticized the central bank's communications as too passive given rising inflation threats.
Research points to a communications gap
Mann pointed to BoE research showing market uncertainty about the interest rate path rose after the March meeting, when it normally falls once a decision is made. Such spikes, she said, help lift borrowing costs and tighten financial conditions.
The BoE's decision not to publish a baseline forecast in its quarterly economic projections a month later likely added to that sense of uncertainty, according to Mann. She said the right response is not to rely on risk premia to do the work of policy, but to reduce inflation risk and policy uncertainty through a clearly communicated reaction function and a sufficiently restrictive path for the Bank Rate.
Source: Investing.com
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