UK external imbalances pose monetary policy challenges
Bank of England MPC member Catherine L. Mann discussed the implications of the UK's external imbalances for monetary policy. Speaking at the London School of Economics, she focused on persistent current account deficits and evolving financial account dynamics.
Old exposures, new energy shocks
Mann highlighted the UK's long-standing current account deficit, which she termed "old exposures.
" A significant driver of this deficit is the negative trade balance, particularly the UK's net energy import status since 2004.
Recent energy price shocks, exacerbated by geopolitical events, have intensified this vulnerability.
These shocks act as cost-push pressures, increasing import prices, raising inflation, and reducing real incomes, thereby complicating the inflation-output trade-off for monetary policy.
Mann noted that energy components' contribution to CPI inflation picked up in March 2026 and is projected to increase further, making the policy response more challenging as monetary policy cannot directly offset such cost-push shocks.
The speech emphasized the need to consider these structural international exposures through a balance of payments lens, linking trade and financial flows to domestic economic performance and policy responses.
New actors in the gilt market
The bulk of Mann's remarks centered on the financial account, which finances the current account deficit.
She identified a shift in the investor base for gilts as a key "new actor" phenomenon.
Changes in gilt ownership are likely to affect the cost of borrowing on international markets, increase the volatility of UK financial conditions to global shocks, and influence the sterling exchange rate.
These factors, in turn, directly impact the transmission of monetary policy.
Mann also examined the UK's net international investment position (NIIP), noting that despite persistent deficits, the NIIP-to-GDP ratio has remained broadly stable due to valuation effects.
However, these valuation changes and shifts in investor composition can heighten the economy's sensitivity to investor sentiments, creating financial vulnerabilities that require careful monitoring by policymakers.
A complex balancing act
Mann's analysis underscores the intricate link between the UK's external position and domestic monetary policy.
The interaction of persistent trade deficits and a changing financial landscape creates a complex environment for the Bank of England.
Policymakers must navigate these structural vulnerabilities, especially amid increasing global volatility, to ensure price stability and financial resilience.
Ignoring these international exposures would leave the UK economy susceptible to shocks that could undermine monetary policy effectiveness.