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Investing.com -- Bank of England policymaker Catherine L. Mann warned that UK inflation is projected to remain above the central bank’s 2% target until the second quarter of 2027, highlighting persistent price pressures despite years of elevated interest rates.
In a speech at the Banco de México’s 100th Anniversary conference, Mann outlined how research influences her monetary policy decisions, particularly in the context of "increasing tensions between inflation persistence and weak growth."
The BOE forecasts headline inflation will peak at 3.8% in quarterly terms, with monthly inflation expected to reach 4%. Services price inflation remains a significant contributor at 2.5 percentage points, while food prices add another 0.5 percentage points.
"Persistent inflation persistence is my central case," Mann stated, suggesting inflation could remain elevated longer than the baseline forecast indicates.
Mann cited research showing UK households’ inflation expectations are particularly sensitive to food price changes, with expectations rising approximately 1 percentage point more following food price increases than decreases.
Wage growth also remains elevated, with a "notable emerging gap" between model predictions and observed wage growth, suggesting "unexplained strength" that could indicate further persistence.
Research indicates firms in high-inflation environments respond asymmetrically to inflation news, raising prices more in response to positive inflation data while showing limited reaction to negative inflation data.
Mann highlighted that the UK’s "inflation attention threshold" is estimated between 3% and 3.6%. When inflation exceeds this level, economic agents become more attentive to price changes, potentially creating a self-reinforcing cycle.
Despite inflation concerns, Mann acknowledged weak UK economic growth, with GDP "barely above pre-Covid" levels and growth rates averaging below 2% since late 2022.
This creates a policy dilemma, as persistent inflation would typically warrant tighter monetary policy, while weak growth would call for looser policy.
Mann described her approach as "activist," combining "persistent" maintenance of the current tight policy stance to counter inflation with readiness for "forceful" rate cuts should downside risks to growth materialize.
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