BoE’s Mann warns of embedded inflation as wage talks loom

Bank of England policymaker Catherine Mann has raised concerns that inflation could become "embedded" in the UK economy. Speaking at a TS Lombard event, Mann warned that inflation might near 4% by the start of the year, coinciding with many firms setting annual pay rises. This timing is critical because early-year wage negotiations can lock in higher pay for 12 months, affecting sectors like hospitality, healthcare, and transport where labor costs are significant.

Mann, known for her hawkish stance, has voted for quarter-point rate hikes in July and September. She argued that the Bank of England previously underestimated the need for prompt action. With markets anticipating a potential rate move in November, Mann emphasized that wage deals and productivity will be key factors in determining whether interest rates need to remain high, even if the broader economy isn't thriving.

For financial markets, Mann's warning shifts focus to wage data as a driver for rate expectations. If inflation remains elevated when wage bargaining begins, larger pay deals could sustain price pressures through a wage-price loop. This dynamic typically affects short-dated UK rate markets like SONIA futures and 2-year gilts first, eventually influencing borrowing costs, including fixed-rate mortgage offers.