2 October 2026: Mann criticises the initial policy response to the Iran war

Diesel has hit £2 per litre, the highest it has ever been.

This is “uncharted territory”; President Trump has already sent markets into a “frenzy” by threatening to ban US diesel exports. Weakened refining infrastructure and lower reserves than those of European counterparts mean the UK could be uniquely “exposed” to further “ripple effects”, including further price rises.

President Trump is trying to bring diesel prices down for US consumers ahead of the midterm elections in November. If he decides to ban US diesel exports, it would “hurt the countries which heavily depend” on it, said the BBC, including the UK. But it might also have “unintended effects that could hurt US production” in the longer term.

The latest data show the situation is worsening fast. This is no longer just a price shock; it is becoming a structural supply-risk event driven by refinery outages, global shortages, and the UK’s extremely thin diesel reserves.

The Fawley refinery, which produces almost 20% of all UK road fuel, has been taken offline until November for maintenance.

This timing is catastrophic because UK diesel stocks cover only about a week of demand, and Fawley’s closure forces the UK to boost imports. Analysts warn that this shutdown “is perfect timing to trigger another crisis for this heavily stretched Government.”

Bank of England interest-rate setter Catherine Mann said yesterday that the Bank made errors in how it framed its policy response to the shock from the war in the Middle East, and that this has pushed up borrowing costs in the UK.

Mann said that the rise in interest rates after the outbreak of the Iran war, which some Monetary Policy Committee members think is helping to bear down on inflation, actually reflected expectations of higher inflation and possibly a "monetary policy uncertainty premium".

She linked this risk premium to what she said were errors in the BoE's initial response in March to the outbreak of the conflict. The BoE held interest rates steady, with a message that she said investors perceived as "wait mode", rather than taking necessary action to control inflation.

"Against this backdrop, as a monetary policymaker, I cannot take comfort from tighter nominal financial conditions when much of that tightening reflects a higher inflation risk premium and, possibly, a monetary policy uncertainty premium that our own decisions and communications may have contributed to," Mann said in a speech at the Nomura London Macro Forum.

As a result, higher interest rates paid by borrowers, including households, businesses and the government, may simply reflect expectations of higher inflation and contribute little to slowing future price growth.

This view stands at odds with that of Governor Andrew Bailey and others on the MPC, who have said that the rise in market borrowing costs has given the Bank time to consider whether it needed to raise rates itself.

Mann said uncertainty about the BoE's reaction function, how investors and the public expect it to react to economic developments and inflation threats, should not compound the problem.

An external member of the Monetary Policy Committee, Mann voted to raise rates last month to 4% from 3.75%, against the majority who voted to hold.

Her comments echoed BoE Chief Economist Huw Pill, who has also criticised the Bank's communications as too passive in the face of rising inflation threats.

Mann pointed to research showing that market uncertainty about the interest rate path rose after the March meeting, when it normally falls after decisions, and that such spikes help lift borrowing costs and tighten financial conditions.

The Bank's decision not to publish a baseline forecast in its quarterly economic projections a month later likely added to uncertainty about its intentions, Mann said.

"In my view, real financial conditions are insufficiently tight," Mann said.

September saw UK annual house price growth halve to 0.8%, the weakest rate since December 2025. Prices fell 0.2% MoM after accounting for seasonal effects.

“Market activity and house prices have been subdued in recent months, in part reflecting the uncertain economic backdrop. Geopolitical tensions remain high. These, in turn, have led to mounting financial market expectations of Base Rate increases, which have maintained upward pressure on market interest rates that underpin mortgage pricing.”

Sterling softened slightly on global FX markets yesterday, with small but broadly negative moves against most major currencies. The day featured mild USD strength, stable euro trading, and mixed performance across other G10 pairs.

The September U.S. jobs report is expected to show a clear cooling in labour‑market momentum, with hiring slowing sharply from August’s surprise strength. Across all major forecasters, the message is consistent: the labour market remains stable, but job creation is losing momentum.

Nonfarm payrolls are forecast to add 90,000–95,000 jobs, with the unemployment rate unchanged at 4.1%. Average hourly earnings are likely to rise by 0.3% m/m, and the average workweek may be marginally lower at 34.3 hours.

President Trump said he doesn’t hold Kevin Warsh accountable for the Federal Reserve’s decision last month to raise interest rates by 25 basis points. All voting policymakers, including Warsh, voted unanimously. “I don’t blame Kevin Warsh,” Trump told Time Magazine. “Although I probably would have voted against the board if I were him.”

Trump often criticised former Fed Chair Jerome Powell for not cutting rates faster, nicknaming him “Too Late” Powell. However, he said he still trusts Warsh, whom he appointed, and instead blames what he calls a board with “Trump derangement syndrome.”

The FOMC’s next interest rate meeting is set for October 28. At the moment, traders see a 64% chance of unchanged rates as the most likely outcome, according to the CME FedWatch tool. However, those odds were as low as 31.4% a week ago and could change again based on upcoming economic data and comments from Committee members.

Minneapolis Fed President Neel Kashkari said in a Reuters interview late yesterday that further rate increases will likely be needed well into 2027. Still, the timing of the next move remains unresolved. Kashkari said he was “open-minded” about the October 28 meeting and did not yet have “a strong view” on whether the Fed should hike then.

He also signalled that risks to his current rate view may be skewed higher if economic resilience persists. Since the September meeting, he said “the data that I’ve gotten suggests the economy is doing even better than I anticipated” while “inflation is still too elevated.” If growth remains exceptionally strong and inflation proves stickier than expected, he said: “policy could need to go higher yet than I’m anticipating at this moment.” Kashkari added that with the labour market looking healthy and the economy performing well, “policy is probably not sufficiently restrictive right now.”

Artificial intelligence and autonomous AI agents will fuel the next evolutionary leap in global and cross-border payments, Federal Reserve Board Governor Christopher Waller said in a speech at Sibos 2026 in Miami.

The payment industry’s early adoption of machine learning and large language models has helped combat payment fraud and speed up reconciliation and similar tasks, Waller said.

“Now it is helping build the foundational infrastructure for AI agents to operate more broadly in the economy,” he added. “These agents can plan and execute multi-step processes using LLMs, enabling them to transact autonomously.”

The US dollar strengthened across global FX markets yesterday, holding near cycle-high levels as long-dated Treasury yields hit fresh multi-decade highs. The move was broad-based: the dollar gained against EUR, GBP, AUD, and NZD, and remained firm against JPY, even as short-term yields eased after softer US inflation data.

The President of the ECB, Christine Lagarde, has already sent the President of the European Council, António Costa, a letter initiating the process to replace Isabel Schnabel, a member of the ECB's Executive Committee, who announced a few days ago that she would leave the institution early.

"I can confirm that President Costa has received the letter from President Lagarde requesting the initiation of the formal procedure for the appointment of a new member of the ECB's Executive Committee," a spokesperson for President Costa's office said.

With this letter, the procedure starts immediately, and António Costa will take the lead. Under EU rules, the Eurogroup, which will meet on October 8 in Luxembourg, will analyse the candidacies proposed by member states and must agree on a candidate.

Next, the European Council will ratify the appointment after consulting the ECB and the European Parliament. The final designation will require a reinforced qualified majority, that is, the support of at least 16 countries that, together, represent at least 65% of the population of the euro area.

Schnabel said last Thursday that she will leave her position at the ECB to assume, starting on January 4, 2027, the directorship of the Monetary and Capital Markets Department of the International Monetary Fund, in addition to serving as a financial advisor to the organisation. Until the day before she joins the IMF, she will continue her duties at the ECB, though without intervening in any matter related to the Fund.

Her departure, reported by various media, fits into the broader turnover the ECB will face in the coming year, marked by the end of chief economist Philip Lane's term in June 2027 and the possible early departure of Christine Lagarde herself from the Presidency of the Bank. However, the official end of her tenure is in October 2027.

Growth across the Eurozone’s factories accelerated in September, according to a closely watched survey, despite rising inflationary pressures.

The S&P Global Eurozone manufacturing PMI came in at 52.9, up from August’s 52.7 and confounding expectations for no change.

A spike in new orders fuelled the rise, the fastest pace since March 2022.

Price pressures remained, however, with inflation rates for both input costs and output prices rising for the first time since May, although they remain below the peaks seen at the start of the war in the Middle East.

Among individual countries, Germany's PMI softened to 53.9 from 54.3. Germany, the bloc’s largest economy, is heavily reliant on manufacturing. The PMI also eased in France, but Italy and Spain moved into positive territory, at 50.4 and 51.0, respectively.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "September has seen a further encouraging improvement in manufacturing growth across the Eurozone. Measured across the Eurozone, production is rising at a rate not seen for four and a half years, as firms boost capacity to meet rising demand.

"The upturn is being driven by rising demand for investment goods such as machinery and equipment. This reflects higher demand for AI and defence-related equipment in particular.

"Demand for consumer goods continues to fall, however, with the increasing cost of living acting as a drag on household spending."

German Chancellor Friedrich Merz told business leaders in Berlin that his government would proceed with gradual structural reforms despite coalition disagreements over pension changes and labour market rules, citing improved growth forecasts driven by debt-funded infrastructure investments.

The Chancellor cited labour market flexibility as a priority, noting that "we have some catching up to do there" ahead of next week's coalition committee discussions on a series of labour market laws. He also highlighted plans to deepen the EU single market and to reform Germany's pension system, though both measures face resistance from his junior coalition partner, the Social Democratic Party.

The Euro weakened sharply on global FX markets yesterday, falling to fresh multi-month lows against the US dollar and losing ground against several other major currencies as stress in European bond markets and surging global yields drove investors out of EUR‑denominated assets.

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