1
00:00:02,960 --> 00:00:07,280
Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

2
00:00:07,840 --> 00:00:10,200
Speaker 2: Now, the Bank of England is widely expected to cut

3
00:00:10,200 --> 00:00:13,320
Speaker 2: its Spenemark interest rate at some point in the summer,

4
00:00:13,360 --> 00:00:15,840
Speaker 2: as inflation near as a two percent target and the

5
00:00:15,960 --> 00:00:20,400
Speaker 2: UK economy emerges from a technical recession. Up until last month,

6
00:00:20,680 --> 00:00:23,959
Speaker 2: two members of the Bank of England's Monetary Policy Committee

7
00:00:24,120 --> 00:00:25,280
Speaker 2: we're still voting.

8
00:00:25,040 --> 00:00:25,880
Speaker 1: For rates to go up.

9
00:00:25,880 --> 00:00:29,080
Speaker 2: Well, Catherine Man and Jonathan Haskell finally changed their stance

10
00:00:29,120 --> 00:00:31,800
Speaker 2: this month, opting to hold race. So I'm delighted to

11
00:00:31,800 --> 00:00:35,639
Speaker 2: be joined now by doctor Catherine Mann a foreign exclusive conversation.

12
00:00:35,680 --> 00:00:38,400
Speaker 2: Doctor Man, thank you for joining us now. As recently

13
00:00:38,400 --> 00:00:41,760
Speaker 2: as February you were still backing an increase in interest rates.

14
00:00:41,960 --> 00:00:43,479
Speaker 1: Why did you change your vote?

15
00:00:44,800 --> 00:00:47,600
Speaker 3: Well, it's really good to be with you, Francine. Of course,

16
00:00:47,640 --> 00:00:51,440
Speaker 3: I'm actually in Chile Belfast at the Royal Economics Society

17
00:00:51,520 --> 00:00:55,800
Speaker 3: annual meetings hosted by Queen's University, but I'm glad to

18
00:00:55,840 --> 00:00:59,560
Speaker 3: be with you, at least online. So there are really

19
00:00:59,640 --> 00:01:02,840
Speaker 3: three main reasons why I thought it was time to

20
00:01:02,960 --> 00:01:06,520
Speaker 3: move from a rate hike in February to the hold

21
00:01:07,080 --> 00:01:09,320
Speaker 3: from last week, and they really have to do with

22
00:01:09,959 --> 00:01:14,279
Speaker 3: consumers disciplining the pricing behavior of firms. These are something

23
00:01:14,319 --> 00:01:17,080
Speaker 3: I've been talking about for some time. The second one

24
00:01:17,240 --> 00:01:20,240
Speaker 3: had to do with a changing dynamic in the labor

25
00:01:20,280 --> 00:01:23,680
Speaker 3: market between labor demand on the part of firms and

26
00:01:23,800 --> 00:01:29,240
Speaker 3: labor supply coming both from households wanting to add more hours,

27
00:01:29,280 --> 00:01:34,800
Speaker 3: and of course the fiscal package associated with the National

28
00:01:34,800 --> 00:01:39,000
Speaker 3: Insurance that was expected by the OBR to increase the

29
00:01:39,080 --> 00:01:42,280
Speaker 3: number of full time equivalent workers. And then number three

30
00:01:42,920 --> 00:01:47,760
Speaker 3: has to do with the financial market curve, and at

31
00:01:47,840 --> 00:01:50,840
Speaker 3: least on these first two there was quite a bit

32
00:01:50,840 --> 00:01:54,000
Speaker 3: of progress from February to March.

33
00:01:54,800 --> 00:01:58,760
Speaker 2: So the BOEZ estimates, doctor Mann, is that inflation will fall.

34
00:01:58,880 --> 00:02:03,520
Speaker 2: You've been very concerned before about underlying inflationary pressures. What's

35
00:02:03,560 --> 00:02:06,640
Speaker 2: your sense now about how worrying those pressures are.

36
00:02:07,040 --> 00:02:07,200
Speaker 1: Well.

37
00:02:07,240 --> 00:02:10,800
Speaker 3: I've always talked about the differences between the deceleration and

38
00:02:10,840 --> 00:02:13,880
Speaker 3: goods prices, which is something that we've seen happening on

39
00:02:13,919 --> 00:02:16,600
Speaker 3: account of the change and energy prices as well as

40
00:02:16,680 --> 00:02:21,880
Speaker 3: changes in global goods prices. These translate into zero, very

41
00:02:21,880 --> 00:02:25,640
Speaker 3: close to zero inflation for goods in the UK market.

42
00:02:25,800 --> 00:02:28,280
Speaker 3: Now services, on the other hand, this is the area

43
00:02:28,360 --> 00:02:32,000
Speaker 3: that has always been my concern because even now on

44
00:02:32,040 --> 00:02:35,160
Speaker 3: a year over year basis, services are still running at

45
00:02:35,160 --> 00:02:35,760
Speaker 3: six percent.

46
00:02:36,120 --> 00:02:38,040
Speaker 4: So how have I changed my view?

47
00:02:38,440 --> 00:02:42,520
Speaker 3: When when I look at the discretionary services, we're looking

48
00:02:42,560 --> 00:02:48,440
Speaker 3: at hotels, restaurants, entertainment, travel, These in the last couple

49
00:02:48,440 --> 00:02:52,560
Speaker 3: of months have really started to soften, and those are

50
00:02:52,600 --> 00:02:56,480
Speaker 3: the most discretionary things in a consumer basket. So when

51
00:02:56,520 --> 00:03:01,360
Speaker 3: those start to soften, it's because people have finally decided,

52
00:03:01,639 --> 00:03:03,640
Speaker 3: you know, I'm not going to pay that much.

53
00:03:04,040 --> 00:03:05,799
Speaker 4: I'm not going to go to a restaurant that is

54
00:03:05,880 --> 00:03:07,000
Speaker 4: charging me this much.

55
00:03:07,240 --> 00:03:11,079
Speaker 3: And that discipline, that consumer discipline is a very important

56
00:03:11,240 --> 00:03:15,800
Speaker 3: ingredient when we think about firms choosing pricing strategies. Basically,

57
00:03:15,840 --> 00:03:19,360
Speaker 3: firms have to respond to consumers saying I'm not going

58
00:03:19,440 --> 00:03:21,480
Speaker 3: to pay that much, and I do see that coming

59
00:03:21,520 --> 00:03:25,320
Speaker 3: through on the data for these discretionary services. So that

60
00:03:25,440 --> 00:03:29,040
Speaker 3: is one of the key reasons why I decided that.

61
00:03:29,040 --> 00:03:30,840
Speaker 4: It was time to move to a hold.

62
00:03:31,240 --> 00:03:33,200
Speaker 3: But the second reason, and I said it has to

63
00:03:33,200 --> 00:03:36,400
Speaker 3: do with the labor market. Six months ago, when we

64
00:03:36,440 --> 00:03:39,560
Speaker 3: looked at the behavior of the labor market talking to

65
00:03:39,640 --> 00:03:44,320
Speaker 3: firms using our agent network and using our surveys for households.

66
00:03:44,520 --> 00:03:47,520
Speaker 4: What we found is that households wanted to respond to

67
00:03:47,560 --> 00:03:48,200
Speaker 4: the cost.

68
00:03:47,920 --> 00:03:52,040
Speaker 3: Of living crisis by adding additional hours, maybe a second job,

69
00:03:52,960 --> 00:03:54,880
Speaker 3: and firms who are willing to go along with that

70
00:03:55,160 --> 00:03:57,920
Speaker 3: six months ago. But where we are now is that

71
00:03:58,040 --> 00:04:02,040
Speaker 3: firms actually are saying, because my wage bill is pretty high,

72
00:04:02,120 --> 00:04:04,720
Speaker 3: what I want to do is cut hours, and I

73
00:04:04,760 --> 00:04:07,960
Speaker 3: don't want to add more headcount. So there's a disconnect

74
00:04:08,000 --> 00:04:12,360
Speaker 3: between what firms want and what households would like to

75
00:04:12,400 --> 00:04:14,800
Speaker 3: have in terms of labor supply. And as they say,

76
00:04:14,840 --> 00:04:20,000
Speaker 3: there's this additional aspect, which is the expectation based on

77
00:04:20,040 --> 00:04:24,480
Speaker 3: the Oeer of the implications of the fiscal package associated

78
00:04:24,520 --> 00:04:26,960
Speaker 3: with the National Insurance that is expected to add two

79
00:04:27,040 --> 00:04:30,159
Speaker 3: hundred thousand full time equivalent workers. So you have firms

80
00:04:30,200 --> 00:04:35,799
Speaker 3: wanting less and households and the fiscal policy wanting more.

81
00:04:36,200 --> 00:04:38,320
Speaker 3: And that disconnect in the labor market, I think is

82
00:04:38,600 --> 00:04:42,840
Speaker 3: something we will start to observe in wage dynamics very soon.

83
00:04:43,680 --> 00:04:46,280
Speaker 2: Given all of this, and even pre this, there's been

84
00:04:46,279 --> 00:04:48,440
Speaker 2: a lot of betting that the BOE will soon switch

85
00:04:48,520 --> 00:04:51,640
Speaker 2: to cutting interest rates. When do you think lower borrowing

86
00:04:51,640 --> 00:04:54,360
Speaker 2: costs will be an option for you for the BOE.

87
00:04:54,720 --> 00:04:57,800
Speaker 3: Well, I think we have to remember Fran seeing that

88
00:04:58,080 --> 00:05:01,320
Speaker 3: the only interest rate we set is and that's very

89
00:05:01,400 --> 00:05:04,880
Speaker 3: very short term. The rest of the market curve is

90
00:05:05,040 --> 00:05:09,719
Speaker 3: market based on market expectations, based on competition among financial institutions,

91
00:05:10,040 --> 00:05:12,279
Speaker 3: and there has been quite a bit of easing already

92
00:05:13,240 --> 00:05:17,560
Speaker 3: even from the March vote. And uh, you know, in

93
00:05:17,560 --> 00:05:20,440
Speaker 3: some sense we can hold bank rate for quite some

94
00:05:20,600 --> 00:05:24,880
Speaker 3: time and the financial markets will already be easing on

95
00:05:24,960 --> 00:05:29,120
Speaker 3: expectations of future cuts. My concern is that, and my

96
00:05:30,040 --> 00:05:34,120
Speaker 3: fundamental reason why I voted to hike in February was

97
00:05:34,200 --> 00:05:37,560
Speaker 3: and at that point I thought that the financial markets

98
00:05:37,600 --> 00:05:41,520
Speaker 3: had been easing too much relative to what I thought

99
00:05:41,560 --> 00:05:46,680
Speaker 3: was the appropriate overall curve for the UK economy. I

100
00:05:46,720 --> 00:05:52,320
Speaker 3: think that there has been a substantial easing even since

101
00:05:52,640 --> 00:05:57,600
Speaker 3: the vote last week, and I think that perhaps markets

102
00:05:57,640 --> 00:06:02,239
Speaker 3: are a bit too complace about how long they think

103
00:06:03,080 --> 00:06:06,599
Speaker 3: the BOE overall the NPC will hold rates.

104
00:06:06,640 --> 00:06:07,200
Speaker 4: But of course I.

105
00:06:07,160 --> 00:06:10,960
Speaker 3: Can't speak for my colleagues. And we are going into

106
00:06:10,960 --> 00:06:17,719
Speaker 3: a forecast round for May and we'll see what the data,

107
00:06:17,920 --> 00:06:22,240
Speaker 3: how the data present themselves over the next few weeks, and.

108
00:06:22,200 --> 00:06:24,080
Speaker 2: I want to get back to actually what the markets

109
00:06:24,120 --> 00:06:26,280
Speaker 2: are expecting the second. But we heard both from Andrew

110
00:06:26,320 --> 00:06:29,040
Speaker 2: Bailey but also hughe Pill saying that policy would remain

111
00:06:29,080 --> 00:06:33,440
Speaker 2: restrictive even if rates were caught. Real rates are also

112
00:06:33,560 --> 00:06:35,960
Speaker 2: rising as policy remain steady and inflation's falling.

113
00:06:36,000 --> 00:06:37,400
Speaker 1: So how do you see those arguments?

114
00:06:37,680 --> 00:06:39,320
Speaker 3: Well, again, I think that we have to put this

115
00:06:39,400 --> 00:06:42,000
Speaker 3: in the context of what the financial markets are doing

116
00:06:42,560 --> 00:06:47,320
Speaker 3: with the nominal rates. Those are coming down substantially, as

117
00:06:47,360 --> 00:06:51,400
Speaker 3: I say, even since last week, and so embedded in

118
00:06:51,520 --> 00:06:56,760
Speaker 3: that is easing regardless of what we do with bank rate.

119
00:06:57,480 --> 00:07:00,679
Speaker 3: So I think we really have to recognize that the

120
00:07:00,720 --> 00:07:04,560
Speaker 3: policy instrument that we have is a very short term instrument,

121
00:07:04,640 --> 00:07:07,040
Speaker 3: and the rest of the curve has to do with

122
00:07:07,320 --> 00:07:11,320
Speaker 3: competition between various financial institutions. If we think of mortgage rates,

123
00:07:11,360 --> 00:07:17,440
Speaker 3: for example, and overall expectations of cuts going forward, those

124
00:07:17,480 --> 00:07:21,320
Speaker 3: are expectations based on markets. We know that markets sometimes

125
00:07:21,360 --> 00:07:25,520
Speaker 3: get it right, sometimes they don't, and you know, we'll

126
00:07:25,560 --> 00:07:28,680
Speaker 3: have to wait to see if they get it right

127
00:07:28,720 --> 00:07:29,200
Speaker 3: this time.

128
00:07:29,520 --> 00:07:32,160
Speaker 2: But doctor Man, when you say markets are being two complacent,

129
00:07:32,600 --> 00:07:34,400
Speaker 2: are they pricing up too many cuts.

130
00:07:34,280 --> 00:07:34,880
Speaker 1: Or not enough?

131
00:07:36,120 --> 00:07:38,160
Speaker 3: I think they're pricing in too many cuts that would

132
00:07:38,160 --> 00:07:43,000
Speaker 3: be my personal view, and so in some sense I

133
00:07:43,080 --> 00:07:46,840
Speaker 3: don't have to cut because the market already is in

134
00:07:46,920 --> 00:07:50,880
Speaker 3: terms of the implications of you know, the market curve

135
00:07:51,520 --> 00:07:55,720
Speaker 3: is mortgage rates for example, those are the rates that

136
00:07:55,760 --> 00:07:58,160
Speaker 3: are faced by borrowers.

137
00:07:59,360 --> 00:08:02,080
Speaker 4: Bank rate is not the rate that borrowers face.

138
00:08:03,040 --> 00:08:05,520
Speaker 2: How many interests right customers? Do you think we'll see

139
00:08:05,520 --> 00:08:06,720
Speaker 2: from the Bank of England this year?

140
00:08:08,440 --> 00:08:10,360
Speaker 3: Well, I really can't say. I mean, there's a lot

141
00:08:10,360 --> 00:08:14,280
Speaker 3: of year left to go. So you know, the market's

142
00:08:14,320 --> 00:08:17,280
Speaker 3: expectation is the one that a lot of people are

143
00:08:17,320 --> 00:08:19,680
Speaker 3: betting money on it, so you know, you figure that

144
00:08:20,160 --> 00:08:24,640
Speaker 3: they've anybody has it right they do. But you know,

145
00:08:25,400 --> 00:08:29,040
Speaker 3: the degree to which the market curve has moved in

146
00:08:29,120 --> 00:08:31,840
Speaker 3: the last you know, in the last week, but even

147
00:08:31,960 --> 00:08:34,280
Speaker 3: more since the beginning of the year, you know, we

148
00:08:34,360 --> 00:08:37,280
Speaker 3: have one hundred basis points of a swing in the

149
00:08:37,320 --> 00:08:41,840
Speaker 3: market curve. And that suggests to me that there is

150
00:08:42,160 --> 00:08:47,680
Speaker 3: uncertainty about in the market about exactly the conduct of

151
00:08:47,720 --> 00:08:48,800
Speaker 3: the economy.

152
00:08:48,360 --> 00:08:49,760
Speaker 4: And the performance going forward.

153
00:08:50,600 --> 00:08:54,840
Speaker 3: And that is the data are unfolding with regard to

154
00:08:54,920 --> 00:08:59,360
Speaker 3: the degree of strength in the underlying economy, the degree

155
00:08:59,400 --> 00:09:04,760
Speaker 3: of strength or deceleration in underlying inflation, and so I

156
00:09:04,760 --> 00:09:08,040
Speaker 3: think there is quite a bit of play in terms

157
00:09:08,080 --> 00:09:12,760
Speaker 3: of how the economy's performance is going forward, and that

158
00:09:12,880 --> 00:09:16,400
Speaker 3: is one reason why we are seeing the degree of

159
00:09:16,760 --> 00:09:19,320
Speaker 3: moving up and down of the curve. And we also

160
00:09:19,360 --> 00:09:23,440
Speaker 3: of course have to recognize that the market curve in

161
00:09:23,520 --> 00:09:28,920
Speaker 3: the UK is importantly affected by the market curves and

162
00:09:29,640 --> 00:09:34,840
Speaker 3: the decisions of our two neighbors to neighboring central banks

163
00:09:34,840 --> 00:09:37,720
Speaker 3: and economies Europe on the one hand and the United

164
00:09:37,720 --> 00:09:38,640
Speaker 3: States on the other.

165
00:09:40,600 --> 00:09:42,920
Speaker 2: Traders are betting, actually that Bank of England could beat

166
00:09:43,120 --> 00:09:46,640
Speaker 2: European and uspers in these interest rate cuts, and they're

167
00:09:46,679 --> 00:09:49,440
Speaker 2: pricing in three cuts this year for the BOE.

168
00:09:49,679 --> 00:09:50,960
Speaker 1: Does that look excessive?

169
00:09:51,000 --> 00:09:54,280
Speaker 2: And actually how rapid could the pivot be towards lower rates.

170
00:09:55,880 --> 00:10:00,719
Speaker 3: So when we look at the data comparing the acceleration

171
00:10:00,920 --> 00:10:06,920
Speaker 3: in inflation and underlying wages for the US, the UK

172
00:10:07,320 --> 00:10:10,560
Speaker 3: and the euro Area, it's a presentation that we've had

173
00:10:10,640 --> 00:10:15,120
Speaker 3: in the Monetary Policy Report over the last several issues,

174
00:10:16,040 --> 00:10:19,680
Speaker 3: and we find that comparison to be particularly interesting and

175
00:10:19,800 --> 00:10:24,760
Speaker 3: valuable when considering not only the conduct of the UK economy,

176
00:10:24,960 --> 00:10:30,520
Speaker 3: but also the potential spillovers from monetary policy choices and

177
00:10:30,600 --> 00:10:33,640
Speaker 3: decisions at are you know, both the Fedruary Reserve and

178
00:10:33,679 --> 00:10:36,760
Speaker 3: the ECB. And one of the things that comes out

179
00:10:36,920 --> 00:10:41,400
Speaker 3: of that comparison is that wage dynamics in the UK

180
00:10:41,960 --> 00:10:46,240
Speaker 3: are stronger and more persistent than the wage dynamics in

181
00:10:46,559 --> 00:10:50,719
Speaker 3: either the United States or the euro Area, and underlying

182
00:10:50,800 --> 00:10:56,200
Speaker 3: services dynamics are also stickier more persistent than either the

183
00:10:56,360 --> 00:11:00,760
Speaker 3: US or the Euro Area. So on that basis, it's

184
00:11:00,840 --> 00:11:05,360
Speaker 3: hard to argue that the BOE would be ahead of

185
00:11:05,440 --> 00:11:08,360
Speaker 3: the other two regions, particularly the United States.

186
00:11:09,679 --> 00:11:12,000
Speaker 2: Catherine Member, the former FED chair Ben Bernanke is of

187
00:11:12,000 --> 00:11:15,240
Speaker 2: course doing this review of BOE forecasting and communication methods

188
00:11:15,520 --> 00:11:18,680
Speaker 2: in response to criticism that the BOE missa jump on inflation.

189
00:11:18,760 --> 00:11:20,760
Speaker 2: What do you think should be done to improve the

190
00:11:20,800 --> 00:11:23,720
Speaker 2: process at the BOE.

191
00:11:24,400 --> 00:11:27,360
Speaker 3: So the Banankee report is will be coming out at

192
00:11:27,360 --> 00:11:29,800
Speaker 3: some point and it will be very interesting to see

193
00:11:30,800 --> 00:11:36,200
Speaker 3: the overall reaction to it and outside. You know, there

194
00:11:36,240 --> 00:11:39,640
Speaker 3: are a lot of different elements of the forecast process.

195
00:11:39,920 --> 00:11:44,319
Speaker 3: What I think is an important part of the process,

196
00:11:44,960 --> 00:11:48,480
Speaker 3: especially over the last two years, when you know the

197
00:11:48,559 --> 00:11:53,600
Speaker 3: economy has been hit by multiple shocks, is an understanding

198
00:11:53,840 --> 00:12:00,560
Speaker 3: of how asymmetric processes work in the economy, how nonlinearities

199
00:12:01,200 --> 00:12:04,200
Speaker 3: work in the economy, and many of the models that

200
00:12:04,240 --> 00:12:07,319
Speaker 3: we use, and I've been on the model building side

201
00:12:07,559 --> 00:12:13,120
Speaker 3: and numerous of my other jobs. Most models simply tend

202
00:12:13,120 --> 00:12:15,400
Speaker 3: to be linear and symmetric. That's just the way they work.

203
00:12:16,480 --> 00:12:19,240
Speaker 3: They're big, they have a lot of interactions. They tend

204
00:12:19,320 --> 00:12:25,560
Speaker 3: to be constructed to be linear and symmetric. That doesn't

205
00:12:25,600 --> 00:12:29,720
Speaker 3: mean you can't bolt on important research that helps you

206
00:12:29,840 --> 00:12:35,280
Speaker 3: understand how firms react in a nonlinear situation or an

207
00:12:35,320 --> 00:12:39,440
Speaker 3: asymmetric situation. And I think thinking seriously about how to

208
00:12:39,480 --> 00:12:46,320
Speaker 3: integrate partially equilibrium or firm level analysis, or how consumers react,

209
00:12:46,360 --> 00:12:50,240
Speaker 3: or how deciles different income deciles, those behaviors are different.

210
00:12:50,440 --> 00:12:56,640
Speaker 3: How to incorporate that disaggregation into a macroeconomic setting. That's

211
00:12:56,640 --> 00:13:01,240
Speaker 3: something that I think is worthy of more analysis within

212
00:13:01,320 --> 00:13:03,040
Speaker 3: our own forecasting process.

213
00:13:04,160 --> 00:13:06,319
Speaker 2: Have you spoken to Ben Bernanke and do you think

214
00:13:06,360 --> 00:13:08,600
Speaker 2: the BOE should do dot plots like the said.

215
00:13:10,200 --> 00:13:15,679
Speaker 3: Well, yeah, BERNANKI did quite a bit of research, speaking

216
00:13:15,720 --> 00:13:18,679
Speaker 3: with many many people both within the bank as well

217
00:13:18,720 --> 00:13:21,840
Speaker 3: as outside at all levels staff all the way up

218
00:13:21,840 --> 00:13:25,199
Speaker 3: to the top. So he had a very comprehensive UH

219
00:13:25,840 --> 00:13:29,680
Speaker 3: interview set in order to understand the background of the

220
00:13:29,800 --> 00:13:33,920
Speaker 3: overall process on dot plots. I think you know, we

221
00:13:34,040 --> 00:13:37,360
Speaker 3: kind of we do better than dot plots. We tell

222
00:13:37,400 --> 00:13:40,960
Speaker 3: you exactly how we vote, and we give speeches and

223
00:13:41,080 --> 00:13:43,880
Speaker 3: interviews to tell you why, so we give you a

224
00:13:43,920 --> 00:13:45,679
Speaker 3: lot more information than a dot plot.

225
00:13:47,720 --> 00:13:50,920
Speaker 2: Thank you so much, Catherine Man, I'm always a pleasure

226
00:13:50,960 --> 00:13:52,880
Speaker 2: to speak to you. Back of England m PC member

227
00:13:52,880 --> 00:13:56,280
Speaker 2: of joining us for this exclusive interview from Belfast