Mann urges Bank Rate increases to tighten real financial conditions
Bank of England policymaker Catherine Mann warned that UK monetary policy is not sufficiently tight, citing loose real financial conditions. Speaking at Nomura, Mann defended her consecutive votes for a 25 basis point Bank Rate increase as inflation is projected to top 4 percent in early 2027.
Unpacking the yield curve gap
Mann highlighted a widening gap between market pricing and survey expectations for UK interest rates.
The overnight index swap curve implies more than 100 basis points of Bank Rate increases over the next 12 months, while the Bank of England Market Participants Survey anticipates rates holding steady before eventual cuts.
A structural decomposition indicates that higher term premia account for 24 basis points of the 100 basis point rise in UK 3-year government bond yields over the past year, compared with just 4 basis points in Germany.
Mann emphasized that this gap reflects heightened inflation risk premia and policy uncertainty following geopolitical conflict in the Middle East.
The illusion of nominal tightness
While nominal yields have risen, real financial conditions loosened after the Middle East conflict began before retracing with compressed spreads.
Inflation has exceeded the 2 percent target for five years, and the Bank of England projects inflation to top 4 percent in early 2027.
Mann stated: “In my view, our current monetary policy stance is not sufficiently tight.”
She warned that policymakers cannot rely on market premia to do the work of policy.
Premia make a poor policy tool
Mann exposes the flaw in relying on market-driven tightening.
If higher nominal yields merely reflect inflation premia and policy hesitation, holding rates steady offers false security.
Her call for immediate rate increases delivers a necessary challenge to committee consensus.