BoE’s Mann: I would rather err on the side of over-tightening

The Bank of England’s Monetary Policy Committee member Catherine Mann stated on Monday that overtightening is simpler to correct than not changing interest rates. She continued by saying that overshoot would result from underestimating how long inflation would last.

The GPB/USD pair is trading at the highest level in five days above 1.2500, supported by a weaker US Dollar across the board.

At the Canadian Association for Business Economics, Mann spoke. She argued that the BoE cannot use the notion that an inflation rate of 3% is close enough as its benchmark.

Key takeaways from Mann speech:

In order to modify inflation and to wring-out the embedded inflation that results from the persistent duration over goal, greater overall tightening would be needed if the policy rate were to stop or be held lower for a longer period of time. I would rather err on the side of tightening too much because of this. But if I am mistaken and inflation slows down faster and the economy worsens more noticeably, I won’t think twice about cutting rates.

As this raises the duration much over the target-consistent rate, it is dangerous to assume that inflation expectations are sufficiently well-anchored and to wait for core inflation to decline. The neutral nominal rate is expected to be higher than in the past, and there is a greater likelihood that inflation will be erratic in the future. These may reinforce the notion that “3% inflation is close enough,” which is common in some areas, but it cannot serve as our guidance. We must express and follow through on our promise to take the necessary steps to hit the 2% target as soon as possible.