"The activist policymaker needs to maintain policy rate discipline and restrictiveness even after this immediate decision."
- Catherine L. Mann
Member of the Bank of England's Monetary Policy Committee, Catherine L. Mann, has explained the need to maintain "policy rate discipline and restrictiveness" even after voting for a 0.50% rate cut.
In a speech given at Leeds Beckett University, Mann explains her most recent vote and her monetary policy strategy as an ‘activist’ policymaker.
At its most recent meeting last week, the MPC voted with a 7-2 majority to cut Bank Rate by a quarter of a percentage point to 4.5% and communicated that a ‘gradual and careful approach to the further withdrawal of monetary policy restraint was appropriate’.
Mann says she voted "for an ‘activist’ 50 basis point cut" but was also in the minority who believe that monetary policy ‘would need to remain restrictive for some time... and Bank Rate would likely stay high given structural persistence and macroeconomic volatility.’
Mann said the Bank's Market Participants Survey shows a longer-run average of Bank Rate at about 3% to 3.5%, noting that she's "more likely at the higher end of that range".
Inflation is projected to rise to 3.7% in the third quarter of this year and is only expected to return to its 2% target in Q4 2027. Mann noted that "weaker activity combined with inflation expected to rise is a challenging, ‘trade-off inducing’ combination for a central bank".
However, she believes it is "spillovers, particularly from the United States, that have dominated market pricing of the Bank Rate path, less so UK economic conditions".
Mann revealed that this was her first vote for a cut in Bank Rate during this cycle, stating that she could "look through the inflation hump, and vote to cut by 50 basis points".
"I’ve contrasted my monetary policy approach with the received wisdom of gradualism as the optimal policy strategy", Mann said, adding that a "vote is not just about the monetary policy response to current conditions, it is also about risk management and communication, including of the longer term".
She added: "It seemed to me that the two quarter-point cuts last year had not appreciably loosened financial conditions. Indeed, the projections in the February Monetary Policy Report were conditioned on a path for Bank Rate that is above four percent for the entirety of the forecast horizon which, given my assessment of the UK outlook, was not consistent with achieving the 2% target sustainably."
Explaining her rationale for a larger rate cut, Mann noted that prior to the vote, the market-implied path for Bank Rate had already loosened by around 30 basis points at the two-year horizon.
However, she said "the activist policymaker needs to maintain policy rate discipline and restrictiveness even after this immediate decision". Mann said this ensures that, "as we move through the inflation hump, expectations remain anchored both in the near and longer term".
To conclude, Mann said: "As an activist policy maker, I chose 50 basis points now, along with continued restrictiveness in the future, and a higher long-term Bank Rate to 1) ‘cut through the noise’, 2) anchor expectations through the inflation hump, and 3) acknowledge structural impediments and macroeconomic volatility in longer term."
