Bank of England's Mann suggests reduced rate hike bets boost case for action

By David Milliken

LONDON, July 2 (Reuters) - Bank of England policymaker Catherine Mann said on Thursday that a reduction in markets' expectations for BoE rate increases since June's Monetary Policy Committee meeting would be a key factor for her decision on rates at the end of this month.

Speaking at an event hosted by French bank Natixis, Mann said tighter financial conditions after the outbreak of the U.S.-Iran war at the end of February had helped offset the inflationary impact of higher energy prices.

But since its last rate meeting in mid-June, markets no longer fully expect the BoE to raise rates this year and do not price in a quarter-point increase until March 2027, lowering borrowing costs for households and firms.

"In June ... financial conditions were much tighter than they are now. That will be an important consideration," Mann said in a question and answer session after her speech.

MANN APPEARS TO BE MPC MEMBER CLOSEST TO SWITCHING VOTE

Mann voted to keep interest rates on hold at 3.75% last month as part of a 7-2 majority on the Monetary Policy Committee but viewed upside inflation risks as more prominent than the other members who voted to hold rates steady.

In minutes of the decision, she also said rates could need to rise in future if there was a "sporadic continuance" of conflict between the United States and Iran that led to a new increase in energy prices after the recent fall.

In Thursday's speech, Mann said she would be ready to vote for a rate rise if higher inflation expectations in the wake of the U.S.-Iran war make it less likely that inflation will return to its 2% target.

A BoE survey of the public's expectations for inflation hit a record high in May. The BoE expects inflation to increase to just above 3.25% later this year from 2.8% in May, a smaller rise than the increase to 3.6%-3.7% that it predicted in April.

"If outturns – especially in expectations – are unfavourable to the underlying inflation process, an activist move can bring inflation expectations and outcomes toward the 2% target," Mann said in written comments released by the BoE.

At the event, Mann said research showed that large moves in rates were more effective in taming inflation than a gradual approach.

"If you're going to move, move big," she said.

Mann said that for the rest of this year she would focus on how rising inflation affected negotiations for 2027 wage deals.

"Given the seasonality of wage negotiations and their dependence on previous inflation and inflation expectations, data outturns — including the expectations for one-year-ahead — in the second half of this year are particularly important for my future decisions," she added. 

Fine-grained labour market data suggested the picture was less weak than the headline unemployment rate of 4.9% implied, she added.

Fiscal surprises could also affect the outlook for rates, she noted, adding that past BoE forecasts — which have to take government budget plans at face value — underestimated inflation when public spending rose more than originally planned. 

Prime Minister Keir Starmer said last month he would stand down and he is likely to be replaced by former Greater Manchester Mayor Andy Burnham, who some investors think might pursue a looser budget policy.

(Reporting by David Milliken; Editing by Suban Abdulla and Andrea Ricci )