Monetary policymakers need to take a “more forceful” approach to setting policy given increasing uncertainty in the global economy, a top Bank of England rate-setter has argued.
Bank official Catherine Mann suggested that the element of good luck that helped to create the relatively stable macroeconomic environment that existed between the 1980s and the global financial crisis, often known as the Great Moderation, might have “run out”.
“Over the next few years at least, volatility in macroeconomic variables likely will be elevated,” Mann said at the Annual Conference of the Society of Professional Economists in London today.
She suggested that uncertainty could come from a range of different sources, such as the impact of climate change, the more active use of fiscal policy or global trade fragmentation.
“If the Great Moderation had a heavy dose of good luck, we might need to reconsider some of the fundamentals of how we believe monetary policy works,” she said.
Standard monetary policy theory suggests that gradualism is the preferable approach to policymaking. Minimising large changes in policy helps to promote stability, the argument goes.
But Mann suggested economic agents were less likely to be forward-looking in an environment with more frequent economic shocks and spillovers, which would make the gradualist approach less effective.
She also pointed out that greater macroeconomic uncertainty implied greater instability in financial markets, which can “blur the signal” policymakers wish to send through monetary policy.
“In such a world, I believe monetary policy actions and communications must be more forceful to cut through the noise,” she said.
Mann was the only member of the Bank’s rate-setting body who opposed the decision to lower interest rates last week. She has warned that underlying inflationary pressures might prove more persistent due to structural changes in the economy.
Although she has voted against cutting interest rates this year, she said that she would “move forcefully” and push for cuts when there was sufficient evidence of diminished inflationary pressure.