The Bank of England Watchers' Conference is an annual forum that convenes a diverse network of individuals with a shared interest in the work of the Bank of England and the broader field of central banking. Now in its fourth year, King’s College London and PGIM hosted a day of rigorous discussion and nuanced debate against the backdrop of pressing global issues, from rising trade protectionism to growing concerns over central bank independence. Below, we outline the most compelling insights from the event.
“In the longer term, if global trade were to fragment, this would reduce output and productivity and raise inflationary pressures.” Clare Lombardelli, Deputy Governor, Bank of England.
Disinflationary Momentum: Progress on disinflation remains gradual but steady. Wage growth, a central driver of inflation, is slowing, with private sector regular pay growth down from recent highs. As a result, a 25-basis-point rate cut in the latest policy outcome reflected confidence in the UK's disinflation trajectory while recognising risks of weaker demand.
Scenario Analysis: The Bank is reforming its monetary policy approach to embed risks and uncertainties more deeply into its framework. In the May policy decision, for example, the BoE considered two scenarios. The first explored the risk that demand weakened more than expected, triggering a quicker unwind of inflation. The second scenario explored the possibility of renewed second-round effects on inflation as well as supply constraints, generating a more persistent inflationary environment.
Global Trade Developments: Higher tariffs and uncertain U.S. policies are poised to dampen growth and inflation over the policy horizon, driven by reduced demand and trade diversion stemming from reduced exports to the U.S. by other nations. Recent exchange rate movements further reinforce the likelihood of lower imported inflation in the UK. Over the long term, the fragmentation of global trade would suppress output and productivity, while exacerbating inflationary pressures.
“It is very important to take from financial markets and businesses, and households what they observe in terms of their degree of restrictiveness. I look at the outcome of monetary policy stance as it is transmitted through financial markets.” Catherine Mann, Member, Monetary Policy Committee, Bank of England
Catherine Mann outlined the complexity surrounding the neutral rate of interest or the ‘R-Star.’ She highlighted the challenges in measuring the real rate gap, influenced by factors like inflation expectations and policy rate estimations. These variables are uncertain due to their reliance on distribution analysis rather than averages, which fail to capture risk and volatility effectively.
She warned of the risks of underestimating real R-star, clarifying its influence on supply-demand equilibrium and long-term market outcomes. She argued that greater attention to uncertainty, volatility, and risk premiums is vital for assessing degrees of restrictiveness and managing spillovers. Robust evaluation of real rate gaps, nominal rate gaps, and inflation expectations is critical to informing monetary policy strategies under fluctuating conditions.
Maurice Obstfeld noted that even in domestic-centric monetary policy frameworks, global economic integration means international forces inevitably influence national R-star estimates. An example lies in the interconnectedness of global financial markets, as evidenced by the growing foreign asset holdings of countries.
While industrial countries exhibited declining real interest rates, emerging markets faced persistent upward pressures since the global financial crisis. He noted that changes in global fiscal policies and geopolitical drivers like defence spending and AI-related infrastructure investments may push R-star higher in the future.
Silvia Ardagna spoke about the long-term determinants of R-star. She noted the pronounced ageing trend in Europe as one of the key downward drivers of neutral interest rates. She explained that this demographic decline creates economic drag, which could only be mitigated by a substantial bounce in productivity. However, even with a significant rebound, this would only partially counterbalance demographic effects in the eurozone.
While the US and UK are better positioned due to less severe demographic pressures, she warned that maintaining neutral rates at their current levels would require consistent productivity gains. Additionally, Silvia discussed the supply of safe assets, highlighting the role of US Treasuries in influencing R-star trends.
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