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.
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