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00:00Hi, everyone. Hi, Catherine. I always look forward to speaking to you, because you truly love data and numbers.
00:09And actually, it's wonderful. You've always had this passion, right, for numbers.
00:14So let's dive straight in and talk about inflation.
00:17Why not? We're not going to waste time. We have 14 minutes.
00:21Nobody's thinking about that, I'm sure.
00:22And we're talking about the UK economy. When you look at household inflation expectations,
00:27compared to the market, to the labor market, what do you worry about the most?
00:32So actually, I worry about inflation expectations more than the labor market,
00:38more than the extent to which expectations show up in wages, for example.
00:42In the end, when we observe inflation happening in the economy, it comes from firms being able to raise prices.
00:50And that's a function of what companies expect to be able to get,
00:56and that's a function of what consumers expect that they will be asked to get.
01:00So it's really the matching of consumers and businesses on their expectations that I worry about the most,
01:07in terms of forward-looking inflation.
01:09What can temper that goes back to the labor market.
01:13As that deteriorates or softens, then people's ability or willingness to spend, to shell out for the restaurant or the shoes or whatever,
01:24that can discipline the pricing strategy of firms.
01:27You're a little bit of an outlier in how you see inflation and inflation expectations and what you worry about.
01:33How do you explain that?
01:34Well, first, I look at the data.
01:36Inflation expectations at the one-, two-, and five-year horizons have drifted.
01:41And they've been drifting for a while.
01:44And that's a part of the persistence.
01:47The second reason why I'm convinced that the research associated with the inflation threshold,
01:54this is where people become very attentive, not just to food.
01:57Everybody is focusing on that right now, the grocery bill and so forth,
02:01but they become attentive to the entire portfolio of things that they have in their basket,
02:06and that makes them very attentive.
02:08And so they're more likely to look at the prices and say,
02:11whoa, I'm afraid that that's going to be in the future as well.
02:16So that threshold research becomes a very important ingredient in my consideration about persistent inflation.
02:22I mean, how do you describe the UK right now?
02:24Again, this is a small, open economy.
02:26Is it more difficult to understand the complexity than other large economies?
02:30So this is a small, open economy, and I think that that is an important ingredient.
02:36The large economies, our neighbors, you know, the United States and Europe, these are much larger economies.
02:43There's a lot more internal competition and a variety of other things that will dampen pricing capacity of firms.
02:51And in here, there's less.
02:54It's a small place, and that's, you know, shocks internally and labor market conditions internally
03:00and competition by businesses internally become a very important part of the inflation process.
03:06But is that why the UK is a slight outlier also in terms of inflation expectations compared to other countries?
03:12Yes, I believe that that is part of the story, an important part of the story.
03:16Going forward?
03:17Yes.
03:18How do you see interest rates developing?
03:19Oh, how?
03:20Oh, yes.
03:21You're welcome.
03:22I don't know if Catherine Mann will answer that.
03:23Right.
03:24Right.
03:25But we're trying.
03:26Right.
03:27Right.
03:28Well, of course, we have a new forecast round coming up.
03:31And you know what I've done in the past.
03:34I've chosen to hold rates as I believe that this inflation persistence scenario that we had as part of our monetary policy report earlier this year,
03:43that I believe that that was viewed as a scenario risk.
03:47I believe it is playing out.
03:49That doesn't mean I'm completely unattentive to downside demand risks.
03:54And I discussed that also and some of our new sort of our new infrastructure that allows us to combine data in such a way on the activity side,
04:03labor markets, GDP components, PMIs, and so forth, that allow us to understand that there is downside risk to activity.
04:12There's upside risk to activity.
04:14And actually, if you do a forecast and you only have a center point to the distribution, you're going to be wrong.
04:20Because the data that are coming in using our methodology, our MITAS methodology, quantile MITAS methodology,
04:28it's a bimodal distribution for the prospects for activity going forward.
04:33It either could be lower than the center or higher than the center, but the center doesn't have a lot of mass to it.
04:39I like the way you put that.
04:42Catherine, I mean, the last time you voted for a cut was in February.
04:44So do you think we've loosened too much?
04:45So the cut in February, I think it's important for me to talk about the three different factors that are important in any decision that I make.
04:53The first factor, of course, is the prospects for inflation.
04:56The second factor is prospects for activity.
04:59And the third is whether or not the OIS curve, which is the market,
05:04the market, is adequately accounting for the domestic components for the UK economy relative to the spillovers that are, of course,
05:15an important part of financial markets in the UK.
05:18In February, I had a view that the labor market would loosen much more quickly and that loosening of the labor market would cascade into lower wage demands,
05:30lower pricing power for firms, and so less inflation uptick.
05:36And I thought at that time that the financial markets, remember, February was when financial markets were in the U.S. were pricing in five cuts, four cuts.
05:49And I thought, this is too loose.
05:52How do you think about the U.S. now?
05:54So, right now, I mean, there are a number of different things going on.
05:58A little uncertainty, a little volatility, and how that's going to cascade into the UK economy through financial markets
06:07is something we'll be looking at very carefully over the course of the next six months.
06:11I know MPC members and, you know, Governor Bailey are very reluctant to talk about what's happening in the U.S. and the Fed,
06:17and rightly so, but it's undeniable, right, that it has kind of, that the forces of the markets also move expectations in the UK.
06:24Yes. Mm-hmm.
06:25So we have a number of different methodological strategies, and I've written about them, and they are both in speeches, charts,
06:34and speeches and the associated methodology in references so that you can go off and look at it yourself.
06:40And it really is, it allows us to decompose movements in the 10-year, movements in the exchange rate,
06:49into macroeconomic factors in the U.S., Europe, Japan versus the UK, as well as policy responses,
06:58and expectation for policy responses, again, in those various markets.
07:02And there are times when what we, when we do that decomposition, the UK component is actually pretty small.
07:10And that's a time when I think it's important to communicate to the markets, you know,
07:15if it's my economy, pay attention to my data.
07:19So where are we now? I mean, is there like a percentage of how much is UK made and internationally made?
07:25So the most recent over the last, over the summer, was mostly UK made, mostly UK made.
07:33And that's...
07:34So that's government policies?
07:35Well, it's the structure of the UK economy, it's the evolution of inflation expectations,
07:42as well as the way policies are being percolated through the economy, especially as we observe how our agents,
07:50those are the people out there around the economy who help us understand business conditions
07:54and citizens conditions, and we go and talk to them outside of London.
07:58And the decision-maker panel, which is the data set that's available on the website.
08:02And outside of London actually is crucial.
08:04Yes, absolutely.
08:05Because you get a different temperature, it's different if you focus on the capital.
08:07Yes.
08:08Given also the impact of financial services.
08:10Absolutely, absolutely.
08:11There is quite a bit of a difference around the UK economy, the various regions, and devolved nations.
08:18So it's very important to get outside the London bubble.
08:21Catherine, given where we are now, do you see a long pause in interest rates, or could you actually see them go up?
08:27So, more than a year ago, I think it was two years ago, I talked about the consequences for my monetary policy decision-making,
08:38of something that I called a monetary policy boogie dance.
08:43Cut, hike, cut, hold, you know.
08:47And I said, this is not what monetary policy makers should do.
08:50So, we are where we are, and we, meaning the Monetary Policy Committee as a majority, has made a decision.
09:01So, for me, I have to use that as where I am.
09:05And so, for me to hike from here, even if I would prefer, I don't prefer that actually, I prefer a longer hold.
09:13But you said that actually you'd be still ready to vote for a cut if something happened.
09:17Right.
09:18What do you need to see in the data for, I don't know if it's a boogie dance or to go lower?
09:22Well, you know that my activist strategy is either hold for longer and make a bigger cut when you do,
09:31to make it very clear that this is not in response to the financial markets or other things.
09:36This is about the UK economy.
09:38So, it really is a matter of nonlinear adjustment in the labor market.
09:43Right now, we are taking some of the heat out of the labor market.
09:47So, nonlinear adjustment on the labor market side or a significant change in prospects that firms talk to us about their demand conditions would be important information for me to communicate that I've seen the materialization of that low, that left-hand hump in our Quantile Midas framework for understanding activity.
10:10I'm going to ask you about QT. I'm really spoiling the audience this Wednesday morning.
10:14Okay.
10:15Talk to us about how you were thinking about QT for that September vote.
10:18Okay.
10:19So, QT is in the background.
10:22We're going to make a decision about it once a year, and I think that's appropriate.
10:26My main policy instrument is bank rate.
10:29However, there are a number of different intersections between bank rate and QT.
10:34So, you cannot distinguish, you can't devolve or separate the two completely.
10:40So, of course, the majority in the MPC voted for $70 billion reduction in the balance sheet through $21 billion of asset sales, and then some roll-off.
10:56So, the executive gets to decide on how to allocate those sales across buckets, short, medium, and long-term buckets.
11:07So, the MPC decided $70 billion in majority, with the executive at the time basically saying what we're going to do is $40 billion in terms of the percentages.
11:18So, I had a view on both the pace and the tenors.
11:24Okay.
11:25So, the pace, you know, I ended up wanting to have the 62, but keeping the same amount of asset sales, and I also wanted to keep the buckets the same.
11:39So, why the pace?
11:42So, as we approach the preferred PMRR, the preferred minimum reserves for banks, we are getting closer and closer to where we're depending on the sterling market facilities that we have in place.
11:59The short-term repo and the index long-term repo, and there's another one for NBFIs.
12:05And so, the closer we get to that, the more we are going to depend on those functioning effectively to have a reserves-demand-driven environment.
12:18So, that we'll supply whatever you want.
12:20I would like to approach that cautiously.
12:22I think we already are closer than most people think to where we start to have to really depend on those facilities.
12:30And you know those facilities are, have only been ramping up as we have been ramping down on the reserves, on the balance sheet.
12:37So, that's the main danger that you're seeing?
12:39That, to me, is the main danger on pace.
12:42Now, the tenors, I kept at one-third, one-third, one-third first, because the most important part of the yield curve is that center part, the medium and short-to-medium term.
12:57It comes through mortgages, it comes through variable rate on bank loans.
13:03So, those are the most important part of the yield curve, and I didn't want to overburden those parts of the yield curve at this time.
13:12I didn't want to tighten that part of the yield curve.
13:15Are we closer to neutral rates?
13:18So, neutral rates have three different elements to them.
13:21I talked about this in the Bank Watchers Conference.
13:24There's inflation drift.
13:26There's nominal interest rate relative to neutral nominal.
13:31And both of those two are key to determine how close we are to the real neutral.
13:36All three of those have a little bit of uncertainty about them.
13:40And so, we are closer to neutral than some people think.
13:45It depends on whether you're in the financial markets or whether you're perhaps thinking about a different timeframe.
13:52People who think about neutral rates in their long-term structural foundations, demographics, productivity growth, that's a 10-year horizon.
14:02For me, that's way off stage.
14:04It's interesting, but it's way off stage.
14:07So, I'm much more focused on the issues that face me in the monetary policy horizon.
14:13And with that regard, some of the factors that I think are most important is to think about volatility in inflation.
14:20Volatility in inflation is associated with an upward bias to the inflation rate because of the way downward rigidity in labor pricing and product pricing.
14:32So, you've got higher volatility in inflation.
14:35You've got high inflation.
14:36Both of those yield upward bias to inflation.
14:39So, that says something to me about the policy rate, nominal policy rate today.
14:45I know you don't like personal questions, so I'm going to ask them anyway.
14:48Because you're a relentless economist.
14:50You love data.
14:52You're not afraid of speaking up, even if everyone else thinks otherwise.
14:57What made you the economist you are today?
14:59And it's very different, I imagine, working for a central bank than it was in private.
15:06Okay.
15:07So, actually, I started working with data when I was in high school.
15:12And I was asked to collect data on housing markets for data resources.
15:19It was the first econometric forecasting firm headed up by Professor Otto Eckstein at Harvard.
15:26So, you're 16 at this point.
15:28What was the high school fit?
15:29Yeah, I was a babysitter and then I turned into a data scientist.
15:32Only it was copying things out on paper with a pencil.
15:36But I think the point here is that it was to understand housing prices.
15:41And this was, you know, 1970.
15:44So, what goes around comes around.
15:47And then I've just stuck with data ever since.
15:49Because it gives you, because I guess it's honest.
15:54Well, you can always interpret it differently.
15:57But it is what it is.
15:58Right?
15:59Right?
16:00Catherine Mann, thank you so much for joining us today.
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