## 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](https://www.imf.org/en/publications/selected-issues-papers/issues/2024/07/24/monetary-policy-issues-in-the-uk-united-kingdom-552412)

## Other formats

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## 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

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### 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.*

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## Content in this bundle

- **Monetary Policy Issues in the UK; United Kingdom; Selected Issues Paper No. 2024/028; June 14, 2024**
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  - [Monetary Policy Issues in the UK; United Kingdom; Selected Issues Paper No. 2024/028; June 14, 2024 (PDF)](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024028.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/selected-issues-papers/issues/2024/07/24/monetary-policy-issues-in-the-uk-united-kingdom-552412_