BoE Mann: Risk of tightening too little more salient

BoE MPC member Catherine Mann expressed a potent concern regarding the UK’s current economic landscape, emphasizing the “salient” risk of “tightening too little” in her speech today.

Mann cited alarming data where inflation in core and services has consistently remained above 6% for over a year now. Drawing from econometric analyses which break down inflation dynamics into components of “expectations and inertia”, she highlighted an unsettling trend — a steady increase in these components, encouraging continuation of inflation persistence. “Worrying to me,” Mann noted, “is that a statistically-derived time-varying trend of inflation has drifted above 2%.”

Mann elucidated the channels through which monetary policy transmits its effects on financial markets, influencing price settings and impacting the real economy prominently through an “expectations channel”.

She emphasized that “duration above target matters for policy risk assessment”, pointing out that the longer the inflation rates hover markedly above target levels, the more challenging and costly it becomes to rein it back to the desired target.

In her assessment, “to pause or to hold the policy rate lower for longer” poses a substantial risk, potentially embedding inflation more deeply and necessitating a more intensive future tightening to alter inflationary expectations and to eliminate the ingrained inflation resulting from a prolonged above-target duration.

To mitigate such adverse outcomes, she championed an approach inclined towards over-tightening, arguing that this strategy would act as a preventive measure against the deeper entrenchment of inflation.

However, Mann remained adaptive to changing economic narratives. She conveyed a readiness to “not hesitate to cut rates” if she observes faster deceleration in inflation paired with notable dip in economic activities.

Full speech of BoE Mann here.