Monetary Policy Issues in the UK: United Kingdom
Selected Issues Papers, July 24, 2024
Source details
- Canonical URL
- Monetary Policy Issues in the UK: United Kingdom
Other formats
Bibliographic details
- Authors: Agnese Carella, Ruo Chen, Katherine Dai, Gloria Li, Ruy Lama, Roland Meeks
- Published: July 24, 2024
- Series: Selected Issues Papers
- DOI: https://doi.org/10.5089/9798400283550.018
Overview
- After hiking rates 14 consecutive times between December 2021 and August 2023 to arrest above-target inflation, the Bank of England (BoE) has held rates at 5.25 percent since then.
- The paper examines three concurrent monetary policy questions:
- How have the macroeconomic and financial effects of BoE monetary tightening during the current cycle compared with experiences in other major advanced economies (AEs), and with previous UK tightening cycles?
- What is the impact of US Fed decisions on UK monetary transmission, and the attendant implications thereof for BoE communications?
- How do model-based predictions of UK monetary policy paths (which seek to stabilize inflation and the output gap) compare with staff’s recommended path in the 2024 Article IV consultation?
Key findings
- Monetary transmission
- Monetary transmission during the current tightening cycle has largely mirrored previous episodes and experiences in other major AEs.
- Exception: the mortgage channel has been slower due to a higher share of fixed-rate mortgages.
- Financial spillovers and external influence
- Fed announcements have an outsized impact on UK financial markets.
- This places a premium on BoE communications in a context where the BoE may diverge from the Fed.
- Model-based optimal paths vs. staff recommendation
- Optimal rate path predictions are close to staff’s recommended path in the 2024 Article IV consultation.
- A caveat: if the BoE attached a high weight to concerns about a prolonged period of above-target inflation leading to de-anchoring of inflation expectations, a slower pace of cuts would be warranted.
Policy implications and recommendations
- Communications
- Strengthen and tailor BoE communications given the outsized impact of Fed announcements and potential divergence between the two central banks.
- Rate-path consideration
- Follow staff’s recommended path, noting model-based optimal paths are similar.
- Consider a slower pace of cuts if policymakers place a high weight on preventing de-anchoring of inflation expectations.
- Financial stability and mortgage channel
- Monitor mortgage-channel dynamics closely due to the slower transmission stemming from a higher share of fixed-rate mortgages.
Monetary Policy Issues in the UK: United Kingdom, Selected Issues Papers, July 24, 2024.
Content in this bundle
- Monetary Policy Issues in the UK; United Kingdom; Selected Issues Paper No. 2024/028; June 14, 2024