Mann weighs inflation persistence, signals longer rate hold
Bank of England policymaker Catherine L. Mann indicated a shift towards a longer hold on interest rates, citing persistent inflation risks despite mixed economic signals. Her assessment has evolved with incoming data and ongoing research, placing more weight on inflation persistence.
Inflation persistence outweighs mixed signals
Catherine L. Mann, a Bank of England policymaker, has shifted her policy view towards a longer hold on Bank Rate.
She attributes this to persistent inflation risks from the Middle East conflict, noting that higher energy prices and firm pricing reactions are likely to keep inflation above the two percent target.
Mann emphasized that disaggregated data presents mixed signals: inflation expectations differ across households, firms, and financial markets, partly influenced by fiscal measures.
Wage developments vary between public and private sectors, with public sector activity growth outpacing the market sector.
Increased volatility in inflation and financial conditions complicates policy assessment.
Mann highlighted the challenge of interpreting noisy signals amidst frequent shocks and embedded second-round effects.
Inflation, previously projected to reach target by H2 2026, saw higher forecasts in the April 2026 Monetary Policy Report following the US-Israel-Iran war.
Research highlights sticky expectations
Research indicates household short-term inflation expectations have picked up materially since the Middle East conflict, entering a non-linear region where shocks are amplified.
Firm surveys show increased state-dependent pricing, where firms adjust prices faster to economic conditions, potentially causing an upside inflation bias and more volatile inflation.
Firms' CPI inflation expectations have shifted rightward since the Iran war, suggesting inflation in the pipeline.
Official wage statistics show mixed signals: private sector regular pay growth is easing, but whole-economy total pay has not decelerated similarly, driven by stronger public sector wage growth.
Wage pressures risk being deferred if future settlements are set against higher inflation and elevated expectations.
The inflation-activity trade-off has re-emerged, with slower projected GDP growth in the April Monetary Policy Report.
Public sector output has grown significantly since Q4 2023, outpacing market sector output, partly due to looser-than-expected fiscal policy.
A hawkish tilt, cautiously delivered
Mann's speech clearly signals a more hawkish stance, emphasizing inflation risks over growth concerns.
While acknowledging data complexities, her focus on persistent energy prices and second-round effects suggests a higher bar for rate cuts.
This nuanced but firm communication aims to anchor expectations and prepare markets for a prolonged period of restrictive policy.