Presentation at Resolution Foundation event with speech by MPC external member Catherine Mann.

1. Wifi

2. Catherine L. Mann
External member of the Monetary Policy Committee
Expectations, lags, and the
transmission of monetary
policy
Resolution Foundation
23 February 2023

3. A stylised representation of the main channels of the monetary
transmission mechanism
Source: Adapted from ECB (n.d.). ‘Transmission mechanism of monetary policy’

4. The monetary stance has tightened considerably since the
beginning of the pandemic – but does that make it tight?
Source: Wu and Xia (2016), Bank of England and Bank calculations.
Notes: The dotted line constrains the shadow rate to the level of Bank Rate as suggested by the authors. Last observation: February 2023.
Wu-Xia shadow rate and Bank Rate
-10
-8
-6
-4
-2
0
2
4
6
8
10
94 98 02 06 10 14 18 22
Percent
Bank Rate
Wu-Xia shadow rate

5. Mortgage rates have risen sharply since December 2021 – but is
that the right date from which to determine macro impact?
Source: Bank of England, Bloomberg Finance L.P, Moneyfacts and Bank calculations.
Notes: For OIS data pre-2008, a Gilt-OIS spread is applied to the equivalent-maturity gilt yield data. Data is monthly until July 2018, and
daily thereafter.
Mortgage and OIS rates

6. Sterling is weaker relative to other currencies despite higher UK
interest rates – and sensitive to domestic prospects too
Source: Bloomberg Finance L.P, Refinitiv Eikon from LSEG and Bank calculations.
Notes: Dotted line denotes cumulative changes in the Sterling Nominal Effective Exchange Rate Index. Latest observation: 17th February
2023
Decomposition of bilateral Sterling-Dollar exchange rate
-28
-24
-20
-16
-12
-8
-4
0
4
8
Jan 22 Apr 22 Jul 22 Oct 22 Jan 23
Percent
UK-specific risk-off
UK policy and macro factors
US policy and macro factors
Global risk-on
Cumulative change in GBP/USD
(solid line) and Sterling ERI (dotted)

7. Financial conditions did tighten significantly, but from a very
accommodative level, and retreated -- net net, are FC tight?
Source: Bloomberg Finance L.P, ICE, Moneyfacts, Refinitiv Eikon from LSEG, Tradeweb and Bank calculations.
Latest observation: January 2023.
A UK financial conditions index
-2
-1
0
1
2
3
97 99 01 03 05 07 09 11 13 15 17 19 21 23
Index
Long term interest rates
Short term interest rates
Equity prices
Financial conditions index
£ exchange rate index
Spreads

8. Research suggests a monetary tightening shock has a significant
negative effect on output and prices – notice timing and channels
Source: Cesa-Bianchi, Thwaites and Vicondoa (2020) and Bank calculations.
Notes: sample period 1992-2019. The solid lines and shaded areas report the median and the 68% confidence intervals, computed using
moving block bootstrap with 5000 replications. Only a subset of impulse response functions shown. For the full set, see Appendix A3.
Impulse response functions to a 100 basis point monetary policy shock
-1
0
1
2
0 4 8 12 16 20 24 28 32 36
1-year nominal interest rate
Percentage points
-5
0
5
10
0 4 8 12 16 20 24 28 32 36
Percent
£ exchange rate index
-3
-2
-1
0
1
0 4 8 12 16 20 24 28 32 36
Percent
GDP
-0.6
-0.4
-0.2
0
0.2
0 4 8 12 16 20 24 28 32 36
Percent
CPI

9. When inflation expectations become backward-looking, inflation
becomes more persistent and output losses more extreme
Source: Bank calculations
Output gap Year-on-year inflation
-2
-1.5
-1
-0.5
0
0.5
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarters after shock
Many backward-
looking firms
Fully forward-looking
baseline
Few backward-
looking firms
Percentage points
-2
0
2
4
6
8
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarters after shock
Many backward-
looking firms
Fully forward-looking
baseline
Few backward-
looking firms
Percentage points

10. Not only that, monetary policy becomes less effective – the lags
are longer – to bring inflation back to target.
Source: Bank calculations
Year-on-year inflation
-0.3
-0.2
-0.1
0
0.1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Percent
Quarters after shock
Many backward-
looking firms
Fully forward-looking
baseline
Few backward-
looking firms

11. • Financial markets have absorbed some of the tightening to date
• Via an accommodative starting point
• Via Sterling channels, among others
• When inflation expectations become backward-looking
• Inflation becomes more persistent and output losses more extreme.
• Monetary policy becomes less effective in bringing inflation back to target.
• Monetary policy must remain tight for a longer time to stabilise the economy
• Failing to do enough now risks the worst of both worlds
• High inflation and lower activity
• As monetary policy will have to stay tighter for longer to achieve the 2% inflation target.
Summary

13. Wifi

17. Wifi