Dr. Mann joined us at our London office to discuss macroeconomic trends in the UK, along with her outlook on the global economy, including:
- Many of the drivers of the “Great Moderation” in macroeconomic volatility may be unwinding and that volatility will likely be elevated over the next few years.
- If the UK ends up with a more volatile economy, it will be an economy with an inflationary bias because prices are more rigid downwards than upwards. Dr. Mann pointed out that inflation volatility is more likely to result in a higher BOE terminal rate as the central bank leans against inflation shocks.
- Dr. Mann stressed that an activist monetary policy strategy is needed in a more volatile world. In the current economic cycle, this strategy implies keeping rates on hold for longer until there are clear signs the remaining persistence in inflation dissipates. Once inflation persistence has been purged, it would then be appropriate to ease fast and forcefully.
Highlights from the Q&A discussion:
Can an activist strategy be an added source of unnecessary volatility, especially in the currency market with pass-through implication to import price?
Dr. Mann noted that containing inflation volatility would ultimately translate to lower financial market volatility by anchoring inflation expectations around the central bank’s target. And the best way to stifle inflation volatility is to maintain policy rate discipline via an activist strategy.
With wage growth running above sustainable rates relative to productivity growth, do you see some upside risks to UK productivity growth that could lead to more subdued services inflation?
Dr. Mann commented that it depends if firms respond to higher than target-consistent wage growth with productivity enhancing investments and how strong demand is going to be forward. Dr. Mann recommended looking at the monthly BoE Decision Maker Panel data to monitor firms’ productivity and demand dynamics.
10-year UK sovereign bond yields have risen from a low of 3.75% in September to as much as 4.6% in November. How much of the rise in bond yields can be attributed to UK-specific factors as opposed to international spillover factors, and what US and Eurozone macro developments guided your decision to keep rates on hold in November?
Dr. Mann attributed the rise in UK bond yields evenly between the domestic and international factors and justified her decision to stand pat on “still seeing a tremendous amount of persistence in the domestic inflationary process.”
MPC member Allen Taylor said that ‘gradual’ was 100bps of cuts over the next year. In contrast, UK interest rate futures currently imply over 60bps of cuts in the next 12 months. How would you define a gradual easing cycle?
Dr. Mann answered that 100bps of rate cuts over the next year would be “too aggressive.”
Is an economic slowdown or recession needed to bring inflation back to target?
Dr. Mann remarked that big and immediate policy changes “can jar the pricing strategies of firms and get milage on the disinflation process without going through the long monetary policy lags and unemployment channel.”
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