During a recent discussion at the Natixis CIB Private Debt Forum, Bank of England Monetary Policy Committee member Catherine L. Mann outlined how recent geopolitical developments have reshaped her assessment of the UK economy and influenced her policy stance. She described an evolving picture marked by moderating underlying trends interrupted by external shocks, leading to greater emphasis on inflation persistence over near-term growth concerns.
Mann noted that earlier in 2026, evidence of easing price and wage pressures alongside slowing activity had brought her closer to supporting a reduction in Bank Rate.
However, the escalation of conflict in the Middle East — specifically involving the US, Israel, and Iran — altered this trajectory.
Higher energy prices, linked to disruptions around the Strait of Hormuz, infrastructure needs, and restocking, are now expected to persist.
These factors have reintroduced an inflation-activity trade-off, with inflation likely to remain above the 2% target within the policy horizon.
A key focus of her remarks was the distinction between headline figures and disaggregated data.
Public-sector activity and wage growth have outpaced the market sector, with public-sector GDP rising notably faster since late 2023.
This divergence, partly driven by fiscal outturns exceeding earlier projections, masks underlying weakness in private-sector demand.
Labor-market indicators show rising headline unemployment, yet with significant variation across industries, suggesting headline weakness may overstate the degree of slack.
Wage pressures in the private sector have eased toward levels consistent with the inflation target, though public-sector dynamics and potential deferred settlements later in 2026 introduce risks of renewed upward pressure.
Inflation expectations have become a central concern. Household short-term measures rose materially following the conflict and remain elevated compared with pre-war levels.
Firms appear to have shifted toward state-dependent pricing behavior, raising prices more readily in response to cost increases than lowering them when costs fall.
This asymmetry contributes to an upward bias and greater volatility in inflation outcomes.
Research cited by Mann indicates that such dynamics, combined with volatility in financial conditions, can amplify second-round effects through wages and prices if expectations become de-anchored.
Financial markets have reflected these uncertainties.
Global spillovers from the conflict increased volatility in UK risk factors and interest-rate expectations.
Mortgage rates rose asymmetrically — climbing faster than they have subsequently eased — adding a headwind to consumption and investment through heightened uncertainty and precautionary saving.
On monetary policy, Mann defended the June 2026 decision to maintain Bank Rate at 3.75%, noting she placed relatively greater weight on upside inflation risks than some colleagues.
She advocated an “activist” approach informed by Bank research showing rapid transmission of policy changes to borrowing costs, firm and household expectations, and spending.
Evidence suggests that policy adjustments can influence pricing expectations within hours and consumer behavior within days.
In this environment, leaning against inflation upside risks helps preserve credibility and prevents expectations from drifting higher.
Mann emphasized that data through the second half of 2026 — particularly on inflation outturns, wage settlements, and expectations — will be decisive.
Unfavorable developments could warrant a more restrictive stance to ensure inflation returns sustainably to target. Her comments underscore the challenges of interpreting noisy signals amid persistent volatility and the importance of disaggregated analysis for proper policy judgements.
