Catherine Mann, a rate-setter at the Bank of England, argued that monetary policy needs to “cut through the noise” as she explained her decision to back a bumper rate cut last week.
Mann was previously the most hawkish member of the Monetary Policy Committee (MPC) and voted against the Bank’s two prior rate cuts, but she surprised markets by calling for a 50 basis point rate cut last week.
In a speech delivered in Leeds, Mann explained her decision, suggesting the persistence of “embedded inflationary behaviours” had diminished because demand in the economy is so weak.
The expected weak path of consumption will likely “constrain firms’ pricing power and will moderate pass-through of costs,” she said.
While the Bank of England had already cut interest rates twice, Mann said this had “not appreciably loosened financial conditions”.
This suggests there is a gap between the Bank of England’s main policy tool – the Bank Rate – and borrowing costs in the real economy, which raises issues for policymakers as they attempt to keep inflation at the two per cent target.
A more ‘activist’ approach would give domestic investors a clearer signal about the direction of monetary policy, Mann argued, helping to keep financial conditions tied to interest rate decisions.
Mann said borrowing costs in the economy had increased despite the rate cuts because of “spillovers” from the US.
“Financial market volatility coming importantly from international spillovers blurs the signal about the desired stance of monetary policy. To ‘cut through the noise’, bolder action and more explicit communication of current stance and future path are needed,” she said.
However, Mann also argued that monetary policy needed to be left in restrictive territory for some time, particularly ahead of the looming bump in inflation.
“The activist policymaker needs to maintain policy rate discipline and restrictiveness even after this immediate decision. This ensures that, as we move through the inflation hump, expectations remain anchored both in the near and longer term,” she said.
The Bank of England expects inflation to reach 3.7 per cent later this year, projecting that it will only return to target in late 2027.
Mann also expressed concern that some “structural impediments” to achieving the inflation target were “not yet fully purged,” requiring tighter policy.
Mann’s so-called ‘activist’ approach contrasts with the Bank of England’s preferred policy of gradualism, which allows policymakers to assess how their decisions are impacting the economy.
She said her main concern was that external shocks could have “non-linear and asymmetric” consequences, which means the knock-on effects from any given shock end up being much larger than the size of the initial disruption.
She questioned whether gradualism was an effective strategy for dealing with these issues.