UK bond yields rise as BOE policymaker Mann warns of persistent inflation

LONDON – Bank of England (BOE) policymaker Catherine Mann said she is still “very concerned” about persistent pressures pushing up Britain’s inflation, a remark that firmed up expectations for higher interest rates.

Dr Mann, the most hawkish member of the BOE’s interest rate setting Monetary Policy Committee (MPC), drew particular attention to high wages for new hires,

“sticky” core inflation,

and uncomfortable levels of price rises in Britain’s dominant service industry.

Money markets boosted bets on how much further the BOE stands to raise borrowing costs in 2023.

They are pricing a peak rate of just over 5.6 per cent by year end, the highest since May. 

Investors dumped British short-end bonds – among the most sensitive to changes in monetary policy – lifting the two-year yield as much as 12 basis points to 4.66 per cent and putting them within a whisker of the September peak that followed then Prime Minister Liz Truss’s budget.

Dr Mann noted that wage hikes for new hires – a “harbinger of what we are ultimately going to see on average pay growth” – were not as drastic as seen in the immediate aftermath of the Covid-19 pandemic, when there was huge demand for workers.

She pointed to data from KPMG and the Recruitment and Employment Confederation that put those gains at about 4 per cent currently.

But “wage increases at 4 per cent are going to challenge us getting to a 2 per cent (inflation) objective in the medium term”, Dr Mann said on Monday on a webinar hosted by consultancy firm Signum Global Advisors. 

She added that “even though we do not project a recession, nevertheless, for some parts of the population, it’s going to be pretty tough”, because the 1 per cent future economic growth rate predicted by the central bank “is not a great rate of growth”.

Her comments echo those made by fellow BOE policymaker Jonathan Haskel in a column for the Scotsman newspaper published on Monday morning.

He said it was important that “we continue to lean against the risks of inflation momentum”.

Markets will be keeping a close eye on further comments made by Dr Mann’s colleagues on Tuesday, as new MPC appointee Megan Greene addresses Parliament’s Treasury Committee and BOE governor Andrew Bailey fields questions from the House of Lords Economic Affairs Committee.

Dovish policymaker Swati Dhingra later in the day will deliver a speech.

British labour market data will also be released on Tuesday morning, with economists expecting a mixed bag.

While unemployment is expected to edge up for the three months to April, showing that demand for workers may be starting to ease, wage growth is also expected to pick up again, underlining inflation concerns.

Despite her worries over inflation persistence, Dr Mann said there was hope to be taken from the fact that inflation expectations among British businesses and households were coming down. “Good news – medium-term inflation expectations have drifted down,” Dr Mann said. “We’d like to see that continue.”

But she added that she was particularly interested to observe how consumer spending was squeezed as higher interest rates began to filter through to mortgage repayments.

In May, the BOE said it thought only around a third of the impact from its string of rate hikes had currently passed through to the real economy, as the majority of British home owners are now on fixed-term mortgage deals set for two or five years.

At the last MPC meeting in May, Dr Mann voted with the majority for a 25 basis point hike. BLOOMBERG