14 May 2026: BoE’s Mann sees risks from geopolitical events

Politics in the UK has become a source of drama over the past two decades, rivalling any soap opera written on either side of the Atlantic. The current protagonists in this political farce are doing their best to entertain the population, who clearly decided last week that a change of characters would add to the drama. Producers will likely have to create a leadership contest to maintain audience interest.

The Prime Minister appears to have been mortally wounded by last week's awful election results, but told his Cabinet yesterday that he intends to soldier on, selflessly forsaking a more peaceful existence for the rough and tumble of the House of Commons.

His Health Minister is the man most likely to mount the first challenge, although two other names are expected to be added to the list, neither of whom currently holds a seat in the Cabinet, including one who doesn’t even hold the required seat in Westminster.

There seems to be no end in sight for this saga, much like the conflict in the Middle East, which is comparable but shown on other networks.

More seriously, hawkish Monetary Policy Committee Member Catherine Mann put her head above the parapet for the first time in several weeks yesterday to express her concerns about the UK economy amid the current political drama.

British government 10-year gilt yields hit their highest level since 2008 on Tuesday, amid pressure on Prime Minister Keir Starmer to resign from members of his Labour Party, before falling back slightly yesterday. "Concerning the 10-year yield and exchange rates, Mann said I take the financial landscape as a key factor in my decision-making," during a question-and-answer session after giving a speech at the London School of Economics.

She went on to outline her concerns about the economy from geopolitical shocks, as the UK appears to be uniquely exposed.

Recent geopolitical events have underscored the extent to which the UK economy is exposed to international shocks requiring a policy response.

The implications of new sources of finance for the UK current account deficit are complex and need close monitoring. However, a tighter policy stance could trigger volatility as new “players” unwind positions, potentially leading to tighter domestic financial conditions than intended.

Monetary policy alone cannot offset any rise in inflation driven by higher energy costs, while the trade-off between inflation and activity is becoming increasingly stark.

If a shock were to occur, like a change of Prime Minister, and weigh on investor confidence, international investors could respond by reducing their gilt holdings. The resulting volatility in yields could translate into a persistent risk premium.

Mann’s tone leaned towards hawkish overall, which comes as no surprise. Her comments focused heavily on persistent inflation risks, geopolitical and energy-related shocks, and the complications tied to tighter policy and financial conditions. Although there was an acknowledgement of risks to growth and activity, inflation concerns appeared to remain the dominant priority.

The Government has committed to updating the law underpinning the ring-fencing regime, which requires banks to separate their retail business from riskier activities such as investment banking.

In a document published yesterday outlining parliamentary priorities, the Government said that reforms to the regime, to be included in a new Enhancing Financial Services Bill, would unlock more finance for UK businesses.

“Improved competition in SME lending will help small businesses access finance," the Chancellor said.

Last year, Rachel Reeves promised "meaningful" reforms to ring-fencing, part of government efforts to slash red tape to boost economic growth.

The pound lost more ground yesterday as traders continue to have concerns about the mess that the Government has found itself in following last week’s local council and devolved assembly elections. It fell to a low of 1.3484 but recovered as the dollar lost ground, closing at 1.3524.

Fifteen years after leaving the Federal Reserve in opposition to an expansive bond-buying programme that has since saddled it with a $6.7 trillion portfolio, Kevin Warsh is expected to return as the U.S. Central Bank's Chairman later this month with a major reform agenda that may be difficult to translate into quick changes.

With critiques spanning everything from how the Fed monitors inflation to its willingness to bail out markets to its communications strategy, Warsh's ideas would involve not only technical reform to the Central Bank's economic analyses but also sensitive shifts in how it speaks to financial markets and the public more broadly, issues previously hashed over and considered hard to meddle with quickly.

Trump’s choice as Chairman could bring about rapid shifts in tone and, at his discretion, cut back on things like press conferences, returning to the more restrained, opaque form of Central Banking that existed before the 2007-2009 recession and financial crisis, which triggered a bias towards more public explanation and "forward guidance" for markets about where policy was heading.

There is a whole “generation” of Wall Street traders who have grown up with clarity and advanced guidance and will take time to adjust to a more opaque Fed.

Warsh is not a fan of that style. Still, he also "doesn't want to disrupt the markets. There are so many things that he wants to do, and it is just going to take time to work through that," said Randall Kroszner, a University of Chicago economics professor who served alongside Warsh as a Fed governor from 2006 to 2009. "It's not just 'off with their heads', or suddenly tomorrow we're going to have the balance sheet be $4 trillion."

U.S. producer prices recorded their largest increase in four years in April, driven by soaring costs for goods and services, the latest sign of accelerating inflation amid the war with Iran.

The stronger-than-expected rise in the Producer Price Index, reported by the Labour Department on Wednesday, posed a political headache for President Donald Trump at home as he arrived in Beijing for meetings with China's leader.

Rising inflation, stoked by the U.S.-Israeli war with Iran, is putting financial pressure on households. Yesterday, on his way to China, Trump commented, "I don't think about Americans' financial situation" when making decisions as he seeks to negotiate an end to the war, adding that preventing Tehran from acquiring a nuclear weapon is his top priority. Trump downplayed Beijing's potential role in ending the conflict.

Treasury Secretary Scott Bessent has been out of the news recently, but gave markets some clarity yesterday on the U.S./Japanese relationship. Bessent met with Japanese Finance Minister Satsuki Katayama in Tokyo to reaffirm what both sides described as “constant and robust” communication on foreign exchange matters.

His Tokyo stop is part of a broader Asia tour that also includes anticipated discussions in China.

The meeting with Katayama focused squarely on foreign-exchange coordination, as the yen has depreciated sharply against the dollar in recent months.

Japan is suspected of conducting roughly $60B in yen-buying interventions in late April 2026 alone, as the currency slid to around 155 per dollar. Since September 2025, joint US-Japan statements have explicitly permitted interventions against “excessive” market swings, allowing Japan to step in to prop up the yen without Washington labelling the moves as currency manipulation.

Since 2022, Japan’s cumulative interventions have surpassed $100B. In the immediate aftermath of the meeting, the USD/JPY rate fell 0.8% to 152.3.

Overall, the dollar index gained ground yesterday, briefly rising above its short-term resistance level of 98.50 to 98.59 before slipping back to close at 98.48.

Martin Kocher, a member of the European Central Bank Governing Council, has said that the upcoming June meeting will determine whether interest rates are raised or left unchanged, underlining uncertainty about the next phase of Eurozone monetary policy.

According to Kocher, policymakers are effectively split between maintaining current levels and implementing another rate hike, depending on incoming inflation and growth data.

His comments highlight that the ECB is entering a decision-sensitive phase, in which small shifts in macroeconomic indicators could determine whether policy tightening continues or stabilises.

The ECB’s dilemma reflects uneven inflation progress across the eurozone, where headline inflation has moderated in some areas while underlying price pressures remain sticky in services and wage-driven sectors.

A potential rate hike would signal that policymakers still view inflation risks as elevated. At the same time, a hold decision would suggest confidence that recent monetary policy decisions have been sufficient to guide inflation back towards target levels.

Financial markets are closely watching the June meeting, which represents a key inflexion point in European monetary policy, particularly after an extended cycle of aggressive rate increases across major developed economies.

The Eurozone has struggled with inflation, with rates varying from 5.4% in Greece to 0.6% in Liechtenstein. This makes it almost impossible to implement a one-size-fits-all monetary policy, particularly during a period of economic and financial stress, as is currently being experienced.

Kucher’s comments were backed up by Bundesbank President Joachim Nagel, who told the German Newspaper, Handelsblatt, that the ECB debated a rate hike last month and signalled that a move in June was likely, as high energy prices have pushed inflation well above its target. It was only a matter of time before this increase started to generate second-round impacts, perpetuating rapid price growth.

French unemployment unexpectedly rose to a five-year high last month, adding to signs that the euro area’s second-largest economy was already on a weak footing when the war in Iran began.

With joblessness rising across all age groups, the rate reached 8.1% in the first quarter, according to data from the national statistics agency Insee. Economists surveyed by Bloomberg had forecast a slight decline to 7.8% from 7.9% at the end of last year.

“The unemployment figures show a slight increase, which reflects the slowdown,” Bank of France governor Francois Villeroy de Galhau said yesterday, adding that “the long-term progress of the French economy” should be kept in mind.

He noted that “in the last slowdown of the economy after 2012, the unemployment rate was above 10%. We are now around 8%, which is obviously not satisfactory news, but since 2010 the French economy has created more than four million jobs net,” he said.

Similarly, Budget Minister David Amiel told France 2 that the numbers are “a call for us to continue our work on this top priority.”

A turning point in the job market would tarnish the record of French President Emmanuel Macron, who has overseen a sustained decrease in unemployment during his decade in power. His governments have attributed that improvement to unpopular labour market reforms and pro-business tax cuts that he pushed through shortly after taking office in 2017.

While Macron cannot run for re-election next year, polls show potential candidates aligned with his economic policies are trailing far-right rivals who pledge to unwind many of his reforms.

Wednesday’s worsening data come despite the government navigating a budget crisis and avoiding another political collapse in February. Figures at the end of April also showed the economy failed to expand in the first three months, and a Bank of France business survey on Tuesday indicated the Iran war has begun to drag on activity and fuel inflationary pressures.

The euro lost ground yesterday as the economy continues to struggle despite rising inflation. It may gain some support from a rate hike next month, but overall, as fears of a bout of stagflation increase,e it is likely to remain under pressure.

The common currency fell to a low of 1.1695 and closed at 1.1710.

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