The Week Ahead - Special Episode - Fireside Chat with Dr…

PodcastThe Week AheadCatherine L. MannOct 1

Catherine Mann argues that UK financial conditions have remained broadly flat since their 2022 tightening despite successive supply shocks, and that the rate path and the nature of exchange-rate movements matter for monetary-policy transmission. She says an inflation risk premium may mean apparently tight conditions are not delivering the Bank of England’s work, underscoring the need for action on Bank Rate to meet the 2% objective. Energy-price volatility is also affecting broader financial conditions, while Mann questions whether futures curves adequately reflect the conflict’s longer-term costs.

Monetary Policy Interest Rates Inflation

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Key Takeaways

Catherine Mann says the UK’s broad financial conditions index has stayed pretty flat since its 2022 tightening, despite successive supply shocks, and argues that an inflation risk premium can make conditions look tight without doing the Bank of England’s work. She says the path of interest rates matters for monetary-policy transmission and that delivering on the 2% inflation objective requires commitment through action on Bank Rate.

Catherine Mann says the effect of a shock on the exchange rate shapes its implications for UK financial conditions and the appropriate policy response. Because a flat aggregate index can mask opposite moves in the dollar and euro, she says analysis should examine which sectors are exposed to each currency; the Bank of England is monitoring how different shocks affect the exchange rate.

Catherine Mann says near-term energy-price volatility is appearing in broader financial-conditions volatility, including yield-curve moves. She also questions whether downward-sloping energy futures curves adequately reflect the conflict’s longer-term costs, including infrastructure, future-proofing, and refining capacity.

ECONOMY

UK Conditions — Catherine Mann says the UK’s broad financial conditions index has been largely flat since its notable tightening in 2022, despite successive supply shocks. She finds this surprising if financial conditions are responding to the shocks’ inflation implications.

“Well, in the in the presentation, I showed you an overall financial conditions index. And, you know, there had…”—

Rate Path — Catherine Mann argues that interest-rate changes matter for monetary-policy transmission because they contribute to volatility. In her view, the path of rates matters, not just their eventual level.

“One is the delta is getting us into this notion of volatility, and the role of deltas and delta translating into volatility measures is being a very important ingredient in…”—

Exchange Rates — Catherine Mann says exchange rates are included in the financial conditions index, but she is surprised they have not figured more prominently in UK financial conditions. The Bank of England is monitoring how different shocks affect the exchange rate.

“The financial conditions index that I showed did have an exchange rate component to it…”—

MARKETS

Energy Volatility — Catherine Mann says near-term energy-price volatility is feeding into broader financial-conditions volatility, including movements in yield curves.

“And then of course, volatility in energy prices is in the near term is showing up in a tremendous amount of volatility in financial conditions more generally in the near…”—

FORECASTS

Energy Futures — Catherine Mann argues that energy futures curves may not adequately price the conflict’s longer-term costs, including infrastructure, future-proofing, and refining capacity. She questions whether the curves’ downward-sloping path, which implies falling energy prices, is really in prospect.

“We hear more and more about, well, it's not just the it's not just the oil going through the Hormuz, it's infrastructure and future proofing, you know, the way you…”—

Energy Futures And Inflation

Mann questions whether energy futures adequately price the conflict’s longer-term costs, while describing volatile energy markets and ongoing research into successive supply shocks and inflation.

Supply Shocks And Financial Conditions

Mann notes that broad UK financial conditions have stayed nearly flat since the 2022 tightening despite repeated supply shocks, suggesting inflation pressures may not be fully reflected.

Rate Changes And Transmission

Mann says both the size and path of rate changes matter, because the way policy evolves influences volatility and how monetary policy transmits to the economy.

Sterling And Exchange-Rate Shocks

Mann says exchange-rate effects may be understated in UK financial conditions and that the type of shock determines currency movements and their policy implications.

Inflation Premium And Bank Rate

Mann argues that unpacking the yield-curve term premium reveals an inflation risk premium, so tight-looking financial conditions cannot replace action on Bank Rate to meet the 2% target.