Bank of England policymaker Catherine Mann said an “activist move” could be required if inflation expectations and realised outcomes shift in a way that is unfavourable to the underlying inflation process, according to a speech text released ahead of an event hosted by Natixis. She argued such action could help steer expectations and inflation back towards the 2% target, and said she would place particular weight on data in the second half of the year. In June, she judged upside risks to inflation to be greater than downside risks to activity.
Mann also said that, in June, cost-oriented inflation pressures were being offset by domestic-oriented financial restrictiveness. She added that disaggregated labour signals in some sectors appeared less weak than the overall unemployment rate. Her speech was scored at 8.2/10 on the FXS Speechtracker, compared with a historic 7.2/10 baseline, indicating a stronger policy message than average.
Bank Holds Steady Amid Persistent Inflation Pressures
We are seeing a clear signal that the Bank of England is leaning towards a longer hold on interest rates. An “activist move” suggests that if upcoming inflation data is poor, a rate hike is a real possibility. This means we should be cautious about pricing in any rate cuts for the rest of 2026.
This hawkish view is reinforced by recent data showing UK services inflation remaining sticky at 4.5%, well above the headline CPI of 2.4%. This persistence in a key domestic price measure shows that underlying pressures are not yet contained. Therefore, we anticipate the Monetary Policy Committee will want to see several months of improvement before considering any easing.
Furthermore, the latest labor market figures support this cautious stance. While the headline unemployment rate recently edged up to 4.5%, wage growth has remained elevated at 5.1%, indicating continued tightness and negotiating power in key sectors. These strong wage deals are a primary driver of the service sector inflation that the bank is watching so closely.
This situation is reminiscent of the mid-2000s, when the Bank held rates steady for an extended period to ensure inflation expectations were fully anchored after a period of price pressure. History suggests a central bank will err on the side of caution following a significant inflationary shock. We should expect similar patience now, especially as we enter the second half of the year.
Implications For FX And Interest Rate Markets
Given this outlook, we believe long positions on the British Pound against currencies with more dovish central banks are attractive. The potential for UK rates to remain higher for longer creates a positive yield differential. We see opportunities in currency futures and options that bet on GBP strength through the end of the third quarter.
We must also adjust our positions in UK interest rate derivatives, such as SONIA futures. This means reducing exposure to bets on imminent rate cuts and considering positions that will profit from rates staying at or near current levels. The heightened focus on second-half data implies that volatility in these markets will likely increase around key data releases in the coming weeks.
