BoE's Mann: Can't rely on risk premia to do work of policy, need to raise rates
Bank of England (BoE) policymaker Catherine Mann argued on Thursday that they can't rely on risk premia to do the work of monetary policy and added that they need to raise the bank rate, per Reuters.
BoE’s Mann flags need for higher rates despite tighter conditions
FXS Speechtracker assigns this speech a 9.4/10, notably above BoE’s Mann historic average of 8.1/10, signaling a stronger-than-usual policy signal. The insistence that the Bank of England “needs to raise bank rate” and cannot rely on risk premia to substitute for monetary tightening marks a clear hawkish shift, as tighter financial conditions are framed as problematic when driven by higher inflation and policy uncertainty premia rather than deliberate rate hikes.
By highlighting that tighter conditions offer “no comfort” if rooted in inflation risk and uncertainty, the remark underscores a preference for explicit Bank Rate increases over passive market-driven tightening, reinforcing hawkish sentiment for the Pound. The admission that the Bank of England may not have clearly articulated the reaction function to the Middle East shock, and that not publishing a baseline forecast in April likely added to uncertainty, suggests a desire to restore credibility and clarity, which typically supports expectations of more decisive future policy action.
Key takeaways
"Tighter financial conditions are no comfort when they reflect higher inflation risk premium, possibly also monetary policy uncertainty premium."
"BoE may not have clearly articulated its reaction function to Middle East shock in March, not publishing baseline forecast in April likely did not help either."
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
