7 March 2025: Mann sees increasing inflation as a “hump”

MPC member Catherine Mann explained why she adopted an uncharacteristically dovish stance at the committee's most recent meeting.

On February 6th, the Bank of England voted to cut the base rate from 4.75% to 4.5%, although Mann joined fellow independent member, Swati Dhingra in voting for a fifty-point cut.

In a speech this week, Mann described herself as an “activist” policymaker who has not previously voted for a rate cut during the current cycle. She does not favour a gradual approach to lowering rates.

"The main uncertainty that I have worried about is the propagation of shocks into non-linear and asymmetric dynamics in the inflation process, which, in my view, requires a different risk management strategy," Mann said. "I call this strategy ‘activism', even if that sometimes means standing pat with a hold," she said.

Explaining her decision to vote for a rate cut last week, the MPC member said the two quarter-point rate cuts the previous year had not significantly loosened financial conditions. "The projections in the February Monetary Policy Report were conditioned on a path for bank rate that is above 4% for the entirety of the forecast horizon, which, given my assessment of the UK outlook, was not consistent with achieving the 2% target sustainably."

However, Mann added that in the future, she will revert to "continued restrictiveness and a higher long-term bank rate" to manage expectations through the inflation “hump.”

While there is a risk that the rising costs of food and fuel could lead to domestic inflation, slowing wage growth and flat employment will counter it, she said.

"We do see an increase in inflation expectations by households, and wages surprised on the upside in the three months to January. I expect that the current and continued weak demand conditions will lead to a further loosening of the labour market, which tends to follow non-linear dynamics. Even if near-term inflation expectations firm on the back of the inflation hump, these factors will restrain pass-through to wages and prevent second-round effects from setting in."

Noting that respondents to the MPC's Market Participants' Survey have consistently predicted the long-term average for rates to be 3-3.5%, Mann said her prediction is "at the higher end of that range".

The Chancellor is now considered certain to either raise taxes or cut welfare spending in her Spring Statement, which is due for publication in the coming weeks.

Rachel Reeves has had her “wiggle room” removed in the past couple of weeks as the global economy, which tends to move at an “iceberg” pace, has suddenly seen momentous change brought about by the Trump administration.

In a speech yesterday she spoke of changes to the welfare system which, she believes, has become “unfit for purpose.”

The pound paused for breath yesterday, following three days of significant growth. It fell to a low of 1.866 and closed at 1.2872. Volatility is expected to continue, as no one is sure what “rabbit” Donald Trump will “pull out of his hat next.”

The publication of the month's most important piece of economic data today has almost been swallowed up by the momentous policy decisions and comments emanating from the White House.

Donald Trump has always “shot from the lip,” but a President has never made policy decisions based on which side of the bed he woke up on that morning.

Yesterday, he signed orders significantly expanding the goods exempted from his new tariffs on Canada and Mexico that were imposed this week.

It is the second time in two days that Trump has rolled back his taxes on imports from America's two biggest trade partners, measures that have raised uncertainty for businesses and worried financial markets.

On Wednesday, just a day after they came into effect, he said he would temporarily spare carmakers from 25% import levies.

Many of the Federal employees let go in Elon Musk’s purge could find employment re-writing economic policy as it changes almost by the day.

Political commentators always felt that the threat of tariffs was little more than a sledgehammer with which to exact concessions from America’s trading partners.

Europe has been braced for a policy change ever since Trump took office but has so far only had to deal with more eccentric policy threats like the takeover of Greenland.

The European Union hopes that increasing spending on defence will appease Trump sufficiently to spare them the economic disaster that tariffs would bring.

The most notable change over the past eight weeks or so has been the incredible change in Trump’s relations with Ukraine and Russia. He has followed up the halting of the supply of military hardware to Kyiv by adding the suspension of intelligence sharing.

The move, which is expected to bring President Zelenskyy scurrying to the negotiation table, has prompted a Russian MP to label the relationship between Washington and Moscow as a “partnership.”

The whole of Washington appears to have the bug with a proposal being debated in Congress for the dissolution of the Federal Reserve.

Congressman, Thomas Massie, reintroduced his bill to abolish the Federal Reserve on Thursday, calling the Central Bank the root cause of inflation and economic instability.

The legislation, known as H.R. 1846, the Federal Reserve Board Abolition Act, would dismantle the entire Fed system, including the Board of Governors and all twelve regional banks. If passed, the bill would wipe out the 1913 Federal Reserve Act, effectively erasing over a century of central banking in the United States.

While he still has a job, FOMC member, Thomas Harker, from the Philadelphia Fed said yesterday that risks to the economy are rising as businesses and consumers become more cautious and inflationary pressures build.

Harker went on to say, “It’s still his base case for inflation to move slowly down to the central bank’s 2% target,” but he is growing more concerned that the decline in price growth “is at risk.”

The dollar index continued its fall yesterday as it is suffering a “rout,” as it fell to a low of 103.75 but regained a little composure to close at 104.21.

The Governing Council of the European Central Bank voted, as expected, for a twenty-five-basis-point cut in its main deposit rate, lowering it to 4.50%.

Effective from March 12, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.50%, 2.65%, and 2.90% respectively, said the Central Bank in a prepared statement.

The disinflation process is well on track, with headline inflation averaging 2.3% in 2025, 1.9% in 2026 and 2.0% in 2027, the statement continued.

Inflation in the euro area edged down to 2.4% in February from 2.5% in January, according to the statistical office of the EU. Citing indicators of underlying inflation, the ECB believes that inflation is returning sustainably to its medium-term target of 2%.

The decision to keep on cutting rates came at a time when the economy in the eurozone is facing increasing uncertainties. In its latest edition of the staff projections on Thursday, the ECB lowered its forecast for economic growth in the eurozone to 0.9 percent for 2025, 1.2 percent for 2026 and 1.3 percent for 2027.

This marks a downward revision from the ECB's forecast in December last year, which had projected 1.1 percent growth in 2025 and 1.4 percent in 2026, while the 2027 outlook remains unchanged.

The ECB attributed the weaker growth outlook for 2025 and 2026 to declining exports and sluggish investment, citing high uncertainty in trade policy and broader economic instability as key factors.

While the monetary policy is becoming "meaningfully less restrictive," the central bank noted that lending in the euro area remains subdued due to past rate hikes.

Christine Lagarde yesterday warned ‘risks are all over the place’ as a sixth interest rate cut in the eurozone failed to quell the storm raging on bond markets.

Borrowing costs surged higher on European bond markets with yields up in Germany, France, Italy, and Spain – as well as the UK. Lower interest rates tend to lower bond yields.

But financial market borrowing costs are rising amid fears over US tariffs affecting inflation and European pledges to ramp up defence spending after Trump’s Oval Office bust-up with Ukrainian leader Volodymyr Zelenskyy.

A planned uptick in defence and infrastructure spending in 2025 is expected to increase growth in Germany and spill over into other Eurozone economies, according to analysts at Goldman Sachs.

Germany has torn up the rule book regarding borrowing to invest in the economy. This denotes the first move in a plan to restructure its entire economy.

The Euro, which would have risen in any event, given the news from Germany, despite the rate cut, continued the gains it has made so far this week. It climbed to a high of 1.0853 but lost ground late in the day to close at 1.0786.

Have a great day!