BoE Official Criticizes Central Bank's Response to Middle East War Shock

Bank of England (BoE) interest rate-setter Catherine Mann recently spoke at the Nomura London Macro Forum, expressing concerns about how the central bank handled its initial response to the shock from the Middle East war in March. She stated that the BoE's message was perceived by investors as 'wait mode', rather than taking necessary action to control inflation.

Mann said that the rise in market interest rates after the outbreak of the Iran war reflected expectations of higher inflation and possibly a 'monetary policy uncertainty premium'. This risk premium, she explained, was due to errors in the BoE's initial response. The BoE held interest rates with a message that investors perceived as passive.

Mann believes that this situation is not ideal for borrowers, including households, businesses, and the government, who may be paying higher interest rates than necessary. She thinks that these higher interest rates are mainly due to expectations of higher inflation, rather than contributing to slowing future price growth. This view contrasts with that of Governor Andrew Bailey and others on the Monetary Policy Committee (MPC), who have said that the rise in market borrowing costs had bought the BoE time to consider whether it needed to raise rates itself.