Just to give you some background, I think the key backdrop against which this decision was made was that the disinflation process has continued, both with the global shocks unwinding as well as with domestic demand pressures easing up, especially after the really tumultuous period we saw during the pandemic. So that, I think, broadly all of us agree on. I think there are other elements, which is I think the risks are more towards the downside for domestic reasons. Consumption and investment's been weak, and together with that is the global situation that we're seeing. Everybody sort of starting to revise their forecasts downwards for the reason that the trade policy atmosphere looks very strained at the moment. So I think alongside those two factors and the general view that I've had that we don't need to weigh down on living standards as much as we have been to be able to get price stability back on target, I think that was the reason I moved more towards a larger reduction in bank rate this time.
Okay. And Dr. Mann, what was your thinking?
So in my view, you have to take the two last votes in context, in comparison. So in February, when I was looking at the conjuncture for the UK economy, I was looking at prospects for the labor market to loosen in a nonlinear way associated with the accumulated effects of national living wage increases as well as the national insurance contribution broadening the base. So I was looking at the potential for the labor market to loosen quite dramatically, and associated with that would be a reduction in consumption and therefore a reduction in the pricing power of firms, which would show up in a more deceleration in inflation rate. So at that point, I did vote for a 50 basis point cut because I thought that financial conditions at that time were not consistent with what I saw as the prospects for the conjuncture. Moving to May is where I chose to hold bank rate at the rate that it was. Now, what changed from February to May was the labor market had not loosened as much as I expected. Consumption does remain weak, but no weaker than I had thought. And then importantly, inflation, although decelerating, was not decelerating consistent with achieving the target of 2% in the medium term. Particularly, for example, goods prices were rising, not falling, services prices continuing to remain well above anything consistent with the 2% objective. But most importantly, from February to May, financial markets had eased quite dramatically by even more than the 50 basis points that I had voted for in February. So it's that combination of conjuncture, activity, inflation, but importantly the state of financial markets that contributed to the two votes that I think need to be seen together in context.
Thank you. And of course the Governor and Miss Breeden were somewhere in the middle. So do you want to explain what your thinking was in voting for the change, the cut that you voted for, Governor?
Oh, thank you. First of all, I would say that although obviously the news has been dominated by the events coming out of the US, and I'm no doubt we'll come on to this later, I'm sure, in my judgment, the key factors in our decision, in my decision certainly, were actually still starting with the domestic UK situation and the UK drivers, and then I sort of played the news coming out of the US and the world economy into that. And in light of that, I'm just picking up what Catherine's just been saying because it's quite a good starting point. I mean, the key thing for me is, are we on course for inflation to come back to the 2% target? Are we on course for the sort of unwinding of any persistence elements from what we saw a few years ago? And the key judgment there for me is really in the labor market. And I do take a slightly different view from Catherine on this. I actually don't think we've seen particular surprises in the inflation outturns relative to what we were expecting. The labor market actually for me has loosened somewhat. I mean, it's interesting with the numbers for pay. They're obviously at a level currently in the official data which is above anything consistent with the target. They're also actually out of line with past relationships. On the other hand, actually we're actually under the path we were expecting in the February report. But more particularly, I think the key question for me is we've got this view which is that we will see pay coming down this year. It was a central point in the survey that our agents did at the start of the year. And at the moment, I would say I think that path is intact, partly on what we're seeing in the more immediate data, but it's actually substantially also based on a lot of trips around the country talking to firms. And my judgment is that we are seeing that. I mean, that's what firms are telling me they're seeing. But that's going to be a crucial judgment going forwards, which is why gradual and careful remain my guiding line, as it were.
Okay, thank you, Miss Breeden.
Thanks, Chair. Like Andrew, I was focused on domestic developments as I approached this decision, with the international environment an overlay on that. And indeed, I'd thought that there was a case for a cut in bank rate even absent the international developments because I judged that that domestic disinflationary process that we've all talked about was progressing as I expected, and I thought it would continue. I had two factors in mind when I approached this decision: persistence and spare capacity. On persistence, I judged the outlook for that to be very dependent upon what was happening to wages, and I had no evidence to doubt the steer from our agents' pay survey that come the end of this year, the policy-relevant horizon wage settlement should be around 3.7, 3.8%, which is a good percentage point below where we are now. The DMP had the same data on spare capacity. It's hard to observe that, but I judged that some was opening up, and my focus was on the labor market. Employment growth is flat. Population growth is a quarter of a percentage point. Vacancies are falling. And there's evidence of employees wanting to work more hours. All of which suggested to me that there was some spare capacity opening up, the labor market was loosening, and that it would continue to do so as we looked ahead. So given monetary policy was restricted, given I had no evidence to suggest that persistence would be higher than we expected, and with loosening in the labor market, I was happy to cut bank rate, and then played the international risks into that.
Okay. Well, thank you. I'm going to go back to you if I could. Dr. Dhingra, you have been outvoted, as you know, you answered this in your questionnaire. 16 out of the 21 MPC meetings that you've attended. So you're an outlier. So we quite like talking to people who've got different views on this. And you highlighted in your questionnaire that you think that we could have contained inflationary pressures with a lower peak in rates. So others, when we've had other members of the MPC in front of us and the Governor, talk about a slow glide path to 2%. You wanted to see a lower peak in rates and then a faster change. Do you want to explain that a little bit more?
So I would say I wanted to see a lower peak and held for longer, as long as was necessary, and also to reduce the risk of then falling too low where we don't have enough policy room and have to rely on unconventional policy tools. That would have been my preferred path, but of course that's not where we ended up. So I've had to adjust my vote according to the paths that actually prevailed as opposed to what would have been my optimal desirable path to follow. That being said, I can give a little bit more perspective on why my view might be different from the others and why sort of ex ante you might think that both things make sense from a point of view of policy setting. So the consensus view was typically sort of coming out of the pandemic that there was strained capacity. There was demand which was fueling inflation, put on top of that supply shocks, and you end up in a situation where you get very high inflation. And of course it's perfectly reasonable at that point to think that the process of disinflation would be asymmetric. It would, you know, inflation would rise much faster and then on the way down it would slow down. Businesses would want to start building margins and we would expect to see real wage growth rise and then consumption also pick up. All of which would then mean a lot more inflation persistence. I didn't think that that was really going to be the case at that point, largely because I was relying a lot more on data that looked at supply chains and granular price information as to how prices passed along the supply chain. And you were already starting to see evidence by the time I was put on the committee that some of these supply chain pressures were starting to ease. There was also sort of a lot of noise in the wage data which I was very early sort of getting very concerned about. And putting those various factors together, my general view was that I didn't think that the disinflation process was really not going to happen, that it was going to be intact. And I'm glad that that's actually borne out in the data.
Okay. So do you agree with this slow glide path towards 2% even though you know, or do you prefer, would you prefer, well just tell us, do you agree with that slow glide path? Is that where you think we're going?
I think so. I think keeping policy gradual is a good thing. The problem now from my point of view is that if I think that for a long time we've held policy too tight, at some point that level and that time period over which policy has been tight starts to really play a role, which means I now need to start thinking about do I increase the decrements for which I've been voting or not. And I think that's really been the key challenge that I've had to face.
Okay. Because you've got your next meeting of course, 29th of June. So well maybe I'll come to that week before actually. Sorry. No week before that. Week before 26th June is it? So forgive me. Dr. Mann, about you and the gradual glide path, because you really, as you explained, moved very sharply from February to May already in your opinion.
So I do believe that we're going to get to 2% at some point in time, but I do think there are two factors that are relevant in my voting strategy. The most recent switch from 50 basis points to hold is importantly affected by the volatility in financial markets that is coming through spillovers from what's going on in other economies, both the macroeconomic developments as well as policy developments in other economies. And because that volatility is so great and has been great since the last couple of years, in order to make a clear statement about the stance of monetary policy appropriate for the UK, I think it's important to make a bolder move and then to hold for longer. Now, if you look at my voting record on the way up, as in when inflation was rising, I was voting for larger increments to be front-loaded in order to keep inflation more at bay. That was not what the committee as a whole chose to do. But my votes on the way down, so to speak, as inflation has come down, is following the same strategy, which is that in order to make a clear statement to the financial markets and also to economic players, for example the pricing strategies of firms or household expectations, because these are affected immediately by votes, voting behavior, voting outcomes, that it's important to be very clear about what the stance of monetary policy should be for the UK. And that's why I follow this so-called activist strategy, which is to make the moves larger, so to cut through the noise that's created by volatility in the financial markets that is coming from spillovers from other large economies that we are surrounded by.
Thank you, Dr. Mann. Bobby Dean MP.
Thank you. I'd like to come in about the voting patterns. I mean it's notable to me that the bank staff have one view and the external members have another. One is about sort of going more boldly, more quickly, and then holding for longer, and the other is a much more sort of softly, softly, more gradual approach. So maybe a question to you, Governor. Do you feel that there is that divide in the committee? I'll just add as well that this time I think four out of five bank staff voted the same way, and the two members we have in front of us today I think have always voted the same way. So can you give us any views on that, whether you think that there's a sort of culture of voting amongst the bank staff?
I would say this, that I think let's take the case of Hugh Pill, who voted with Catherine. I think Hugh has set out a very clear view. He doesn't, he takes a different, he is the exception this time.
Yeah. Oh, we've had other, I mean Dave Ramston has voted different ways over time. So John Cunliffe did when he was on the committee. So it's not the case.
I think you've also heard two, if you don't mind me saying so, two very different views from the external members of the committee this morning. And that's, look, that's fine. I've always said in the past, because we've had these discussions before about so-called group think on the committee, that I really don't think there is group think on the committee. Now, you know, the evidence of that in some ways of course is the votes, or it is the votes actually. And you know, do think that what we saw in the last meeting I think does demonstrate that.
Okay. But I mean just to maybe Sarah Breeden, you would like to come in as well. I know you voted the same way as the majority and as the Governor every time. What's your view on the bank staff kind of tending to cluster together? I know there are exceptions that the Governor has just mentioned but it does seem to be a pattern.
So look, despite having voted with the majority on each occasion that I've voted on the MPC, so far, my interpretation of the economy and what's driving inflation has at times differed. So you should think of the majority as having a broad church within it. And what we try and do in our communications is convey what that broad church includes, so that as data come out through time, the markets and people like yourselves can understand where we're likely to go. I mentioned at the start when I described my vote on this occasion that had the international developments not occurred, I would probably have voted to cut rates anyway. As the minutes of our meeting make clear, that was not the case for all of them. So I guess I'd underline, think of the majority as a broad church and our communications being as important as the vote in signaling where it is that policy is headed.
That's an interesting point. If I could just add, I mean from my perspective I probably wasn't really quite in that position going in as it were before the international stuff. I was frankly much more undecided and waiting to see how the UK position evolves. So there are differences of views between us and that.
Yeah, I appreciate there'll be differences of views, but the outcomes I guess are important and whether or not you go for a bolder 0.5 move at any point as others on the panel today have suggested is quite significant. I mean Dr. Dhingra, I don't know if you want to come in and give your perspective on this potential. Do you notice any differences between the external and bank members of the group?
I can talk about my position as to why I was moved towards a 50 basis points cut as opposed to what would have been the majority of a 25 basis points cut.
We've heard your view but kind of whether or not you feel that there's a divide or not. Your view on that.
I don't see that and I take my job very seriously. I'm an external member. I have to look at the research and the evidence and vote according to what I think is right and I'm better at doing that job than figuring out what the dynamics of any committee are.
Okay, good. I guess we're politicians and Mr. Dean just give Dr. Mann a chance to come in as well. Dr. Mann, your view as well if you feel there's any differences between the bank.
Sorry about that. So again, my view is that each person on the committee takes their job very, very seriously and evaluates the research and comes to conclusions. And I think what you're hearing from this very short introduction really is the extent to which people interpret the data differently. They interpret the collection of say activity, inflation, and financial markets. They weight those things differently. I think you see, we'll probably be talking about scenarios later. These are different ways of presenting possible outcomes that don't cover everything that we've been thinking about or talking about but are a selected set of possible ways in which shocks could be different or economic relationships could have changed over time. And so those explorations through scenarios are a reflection of the kind of differences in what we bring to the analysis and to our decisions. So I don't think the committee isn't sort of us and them type of thing. It's very much different people approaching the data, economic relationships, weighting of these different variables in different ways.
Thank you. And we've obviously had got a lot of detail particularly from Dr. Dhingra this time around in answers in her questionnaire. Before I move on to Mr. Grady, Governor, I mean we've seen a repeated set of reductions in the interest rate, that glide path that you've talked about before in front of this committee. Are you confident that that's going to be the way forward when coming up to your June meeting?
Well, I'm not going to make any prediction on the outcome of the June meeting.
That's a, it's just worth a try. Interesting. Good try. Yeah, one of the things I sort of spent a lot of time just with when I did when I faced the journalist is spotting those questions which keep coming up. Pretty blatant that one.
Multiple. Yeah, they're more blatant. Yours was much more subtle. Surprise for that. Look, I think it's a fair question though. I mean in terms of the path I think that the path remains downwards but how far and how quickly is now shrouded in a lot more uncertainty frankly and I'm sure we'll come on to the external situation but it is of course relevant there. I mean we've added the word unpredictable to uncertain because of the sheer nature of what we're dealing with.
So Dr. Mann, I hope you heard that answer clearly. What's your view about the general direction of travel, the glide path?
No, I would agree with the view that the glide path is downward. I do, we'll have to see what kind of briefings we will get for the next vote and how some of the data develop in terms of particularly my concern is on inflationary pressures. And so I can say that the direction is down but in what sort of steps and what time frame I think we still don't know about that. We have a lot more to be looking at in terms of the outcome of policies that haven't yet been fully developed in other economies and the spillovers from those will be important for decision making.
Thank you. Sarah Breeden briefly.
Thanks, Chair. The big picture narrative of policy loosening as the waves of disinflation continue, I agree with, but as others have said there is uncertainty about how far, how fast. You still think we're going in the downward direction?
And Dr. Dhingra, you agree? Okay. Thank you. John Grady MP.
Thank you, Dame Meg. Governor, since we last spoke at this committee, the global trading system has become somewhat unpredictable. From Liberation Day to arguments this weekend about the exports of critical minerals and rare earths from China. There are real concerns about President Trump's big, beautiful bill, and warnings that the US bond market could crack, with the Treasury Secretary of the US reassuring investors it seems that the US won't default on its debt. So where does this lead the global trading system and the global economy more widely?
It leaves us with of course a lot more uncertainty and unpredictability about it. I mean just to illustrate that, there are really, I'd sort of boil this down into two judgments that we have to make. I mean what are the policies going to be and what's the impact of those policies? And obviously on the first one, what are the policies going to be, I mean the challenge we have to do is that whenever we take our decisions we have to stop the music at some point and say well, you know, where are we? And that was very difficult and of course indeed if you go now what three weeks or so since we took that decision as you were just saying the world, you know, we've had a lot more has come out in that period going frankly going both ways in terms of where this may. And as Catherine was saying, you know, this is having a big impact on markets. Markets have moved quite a bit since we had our last meeting. I think it's also, but I think it's more in some ways more important to focus on the second point which is what's the impact of all of this? And I think at the moment my judgment would be as follows. I think the impact of fragmenting the world trading system is negative for world growth and world activity. I think it obviously increases uncertainty and uncertainty, and this is very well established in sort of economics, but you hear it now when you go around the country from businesses, you know, one impact of that is that it tends to cause delays and putting off of investment decisions because an investment decision typically is a once-only irreversible decision and so if you're offered the chance in that context to say should I take it now or should I wait, the appeal of waiting goes up. Frankly, as we've I think said before, I mean the impact on prices is much more ambiguous actually and this is the real area for me of question. I think the first interpretations are really that it's lower activity, lower world activity which will lower world export prices which will lower inflation. That's quite open to question though. I was interested this morning the OECD have come out with their new projections and they've actually somewhat gone the other way and said yes it's lower for activity but it's not necessarily lower for inflation. And the reason for that is, and we tried to bring this out in our scenarios, is that if it affects the supply side of the world economy, so if it starts disrupting supply chains for instance, that could have the opposite effect that it could actually start disrupting markets, supply chains and markets again and that could actually put some upward pressure into inflation. Now, at the moment, it's really frankly too soon to tell. We're not seeing the sort of effects on supply chains that we were seeing sort of back in 2021 for instance, but it is a genuine concern because, you know, I think the best example of this is the US China. I mean, I think US China is the center of this whole thing really. And the question of where that's going and what effect that's having on supply is obviously a very important question. So, we're going to have to keep watching this very carefully, I'm afraid.
Well, question. I mean, we've heard various diverse views about how monetary policy should move forward. Does all this uncertainty lead to a serious risk that despite the bank's best endeavors, monetary policy could go badly wrong with inflation undershooting or overshooting the target?
Let me say two things on that. Start with more of the sort of the theory part and then come on to the sort of practice. There's a huge amount of debate obviously about how you respond to uncertainty. I mean one school of thought is that it causes you to react more cautiously and that's because you sort of in a sense you want to wait to see how it develops. That's not an unreasonable view and one that I certainly put some weight on. But it is not a reasonable view if you think that there is a threat to the integrity of the anchor which is the inflation target. Clearly in that case the answer I think is that you should act more aggressively, more, Catherine might use the word activistly, I don't know, as an activist. Now I'm not seeing that at the moment but I think it's important, that's an important thing that we have to sort of keep in our mind as we make these judgments that it isn't always the case that you respond to uncertainty by being more cautious. Now, that's the first part. In terms of the second part, how you sort of play that out into the decisions and you made the point, you know, could you go badly wrong? And that was a very big question for me and this decision we took three weeks ago. And this is really where the scenarios came in because we painted two scenarios. One was, you know, frankly weaker demand, could be domestic, could be international. The other was the supply side, could be domestic, could be international. And the question for me was these scenarios helped me to answer the question which your question really goes to which is how badly wrong could you be as a guide. And I think the point I took from the scenarios was you could be wrong but you're not going to be so badly wrong that you're losing control at that point. And that gave me greater confidence to use what I might call the more careful and gradualist, continue to use the more careful and gradualist approach and do the 25.
And Dr. Mann, how about you? You confident that things won't go badly wrong faced with all this unpredictability?
Oh, I would agree that we have a tremendous amount of research background coming from the staff to give us information about alternative outcomes under alternative assumptions about the relationships among economic variables and the prospects for global demand or inflation. The one point where I would differ a little bit with what the Governor has painted is on the sort of the inflation dynamics and how uncertainty about inflation dynamics, what do we know about that from research? What we know from the research by Bank staff is that in an environment of higher volatility in inflation, something we may well observe as supply chain costs change or global export prices change or whatever variability. So under that environment where you have inflation volatility combined with the nature of labor and product markets in the UK which is that there is downward bias to price settings and to wage settings, in that environment you end up with upward bias on inflation prospects for inflation going forward. And the proper response under that kind of scenario is for a more aggressive, activist, bold move to ensure that the anchor, the 2% objective doesn't drift. I wrote a number of speeches about this topic during the high inflation period of a couple years ago. I think that is still something we have to be concerned about because inflation of course has come in as expected but nevertheless high and it approaches a threshold which in the research, a 4% inflation is a threshold that may change consumer behavior and attitudes towards an inflation process which then could feed back to wages. So it's important to kind of think about these asymmetries in both the inflation dynamics and in wage and price settings as we consider appropriate monetary policy decisions.
And then last question, that's really all very interesting but what my constituents want to know is when they go to the shops that prices aren't going to get out of control again. How confident are you Dr. Dhingra against this background that we can reassure my constituents that when they go to the shops in Glasgow prices over the next two, three, four years will remain within a tolerable band and not be subject to excessive inflation?
I'm somewhat encouraged by the developments that have happened globally that they are going to stay within control for the reason that the really worst case extreme scenarios would be where you see a real meltdown in supply chains which is to say that the EU starts following policies similar to the ones that the US is implementing. So does China and we see the world fragmenting into these very multipolar places and then everybody wants to go chase the same suppliers and get all their suppliers from there. I don't think we're headed in that direction. If anything, the way the global policy developments are going, of course, this is all contingent on me commenting about something which is highly unpredictable. But given the way things have panned out, I'm actually a little bit more reassured that it's going to be milder than some of these not even the worst case scenarios, but even some of the bad case scenarios. So, I'm somewhat reassured by that. The only other threat that you can see at the moment would be that we've had this uptick in inflation and maybe that translates into something more permanent, something more persistent. And again there I'm somewhat reassured by the fact that you don't see the same kinds of inflation expectations uptick that you see in household expectations show up in firms. So that's somewhat encouraging. It's also something which looks more like a one-off change rather than something which has momentum on its own. So again, I'm not terribly worried about that. And I think the context really helps in that case that we've had a period where there has been consumption weakness, where the labor market has loosened. We've had interest rates much more restrictive now. So we're not in that situation which we found ourselves in in 2022 when the really large energy supply shock happened. So in that sense, I think you can probably go to your constituents and be a lot more reassuring than what you could do say in 2022.
And Mr. Peron, if we were having a tour around the shops at Parkhead Cross in Easterhouse, would you be in a similar boat of reassuring my constituents that prices will remain stable over the next three, four years?
I would underline the last point that Dr. Dhingra made just then. What's important is the context in which the current inflationary dynamics are occurring. And with restrictive monetary policy and with a looser labor market, the conditions for inflationary dynamics getting out of control are very considerably less. I would reassure your constituents.
Good. Thank you. I should say I will be in Glasgow tomorrow and Thursday. I try to do this for men for shops and we have a committee visit. We have a committee visit there. I think that's enough. Mr. Grady's been speaking up for his constituencies so much. We all need to visit now. But and Dr. Dhingra, thank you because you've gone into a lot of that in detail in your questionnaire which was very interesting reading. So that is obviously now published as well for anyone who's following today. Chris Coghlan MP.
Thank you, Chair. Governor, we've seen a dramatic recovery in equity markets in recent weeks since the heavy selloff since Liberation Day. So, to what extent do you support the hypothesis of the taco trade that the damage that President Trump does to the world economy is overstated because Trump always chickens out and he's terrified of the bond markets?
Well, I'm not really going to get into the question of the taco. I think that's a euphemism that people in markets have come up with. I don't think the President particularly likes it. I think obviously you have seen a lot of volatility. Equity markets, it's part of that story but it's not the whole story. I think the points when, you know, I think what I would be most concerned is when we see the sort of constellation of rising government bond yields, falling currency and falling equity markets. Now we had two periods sort of in the post-Liberation Day period where that became quite frankly acute and on both occasions I think the administration did respond. The first one led to the 90-day sort of period to negotiate trade agreements. The second one concerned the position of Chair Powell. We haven't seen that particular constellation since because as you rightly say the equity markets haven't behaved in the same way. But I think we have to watch this very carefully because the equity markets clearly are obviously discounting views of the future. So they appear to be discounting a more optimistic view of how this will come out. Well I think what we need to bear in mind is therefore that their view of it is conditioned on that and if obviously things change then they will respond. What we haven't seen however fortunately is I think a real sort of really serious threat to financial stability coming out of this. If you look at the whole period now because
It's not over, but that would be my assessment.
Exactly. And quite to your point, obviously we've seen an increase in US bond yields.
Rise in US tariffs yet fall in the dollar.
Which you would not expect. And so I mean do you think there's a chance of that being a long-term threat to the dollar's safe haven status and potentially?
Yeah. Okay. Let me take that in two parts. I think it does indicate that non-US investors are obviously reassessing their view of the amount of US risk they want to take. I think by the way a context to put that in because people in the markets say this quite often to us is that quite a few of those they were probably overweight US risk going back in time because they had a very optimistic view of the US economy, not unreasonably actually, and they're reassessing that and they will do that. I mean they will go on doing that I'm sure as this sort of story unfolds. Now I deliberately separated that off from the reserve currency point. Obviously there's a link here in terms of how much of a particular currency risk do investors choose to have but I distinguish this because I think reserve currency carries with it a lot more. It carries a lot more if you like sort of embedded presence in world markets. It carries a lot more infrastructure with it. And the dollar has had that position obviously for well ever since it took it over from us actually really. And that's also increasingly embedded in markets. So if you think about the role that US treasuries perform as the safe asset in markets and therefore as collateral and security, it would take a lot to change that. And also, you know, frankly, I don't think any of us should want to see that happen because that would be quite a destabilizing moment. I don't see that happening at the moment. I think we have to watch it again, but I don't see that happening at the moment. But that's a much bigger effect than markets repositioning themselves in how much particular risk they take.
Did you... I wanted to add just one point on the dollar that reflects a lot of the market intelligence that we've been getting. The governor talked about how we'd seen some changing of positions in US assets. The interesting story about the US dollar is that some of that is about foreign holdings of those US assets not being previously hedged and now being hedged. So you get a movement just in the currency and less so in the underlying asset prices. That matters for us as monetary policy makers because what happens to the exchange rate is an important input into the inflation outlook. But it also matters from a financial stability perspective as to who's bearing losses and how might they come back. That hasn't been an issue for UK financial stability. And if I heard correctly from the governor, there hasn't been a threat to UK financial stability from that. You would agree with that?
And how about the increase in long-term US debt yields that we're seeing that I mean obviously both as a result of President Trump but also potentially you know the tax cuts coming through. I mean how concerned are you about that and the flow through to the UK?
Why don't I take that one, Mr. Coghlan. We've seen a trend globally of long-term interest rates rising. So, it's a story in the US, it's a story in the UK, it's a story in Europe and Japan. It's not really been a UK specific story. The good news is that markets have functioned through all of that. It doesn't much matter from a monetary policy perspective. The rates that matter for businesses and households are at the shorter end. But from a financial stability perspective we have seen markets function through that period. Anything you want to add, Governor?
No, I would agree with that. I would just emphasize the point that some of the biggest rises in long-term yields have been in Japan. So we do have to watch outside the US as well.
Yeah. Thank you very much Rachel Blake.
Thank you chair. Governor, you've talked about the importance of trade deals and I wanted to ask how you assess the significance in terms of growth and inflation of the recent UK EU trade deal.
Well, I'm a strong supporter of open markets and free trade. And I made some remarks on this actually last week in Dublin. Let me draw a sort of distinction between the short term and the long term. I think in the short one might put the sort of the US-UK agreement into the shorter term in the sense it's addressing obviously the particular issue of the moment. I've said before I think in the circumstances and I use those words advisedly. I think it's a good thing but the reason I use the words in the circumstances are two parts to it. One is that it still leaves obviously the average tariff level higher than it was pre all of this starting. That's important to bear in mind. The second thing is, and this is where I get to the other agreements, there's a sort of bridge to that. The UK is a very open economy. Always has been for, you know, ever since we industrialized. So what affects our economy is not just whatever trade agreements we do, but also what the rest of the world does. And it's sort of like you go back to this point about China, but you could make the same point about the EU that whatever they do will also have an effect on us as well. Now on the other you raised rightly the point about what's been agreed with the EU and the India trade deal. I see these in a slightly longer context. Go back to Brexit for a moment. We've always sometimes been slightly controversial for saying this. I said it again last week then I'll just reiterate it. I don't take a view on Brexit per se because I'm a public official but you've asked me in this committee many times on the economic effects of it and I said in the short run making an economy less open will have a negative effect in the longer run obviously the real economy can adjust and part of that adjustment is trade agreements with other parts of the world which the previous government was seeking and this government is seeking is continuity there. The India trade agreement has been in the works for a very long time, hasn't it? So it's good to see it, it's really good to see it materializing. The effects of those agreements though tend to take quite a while to come through. I mean, it requires sort of adjustments going on in real in trade patterns, in real economy patterns. So, in the long run, that's what we need to see in a way because it will help the economy to adjust. It will support the development of markets, but it will take some while to come through.
So, previously the bank estimated that the trade and cooperation agreement reduced UK productivity by 3 and a quarter percent compared to EU membership. At what point will you be able to estimate how the new agreements compare to that?
We'll need to know a lot more about how they go and that they take effect and what economic impact there is from them. And of course, the EU agreement is quite a specific thing. It's not a trade agreement in a broad sense. It's addressing some particular areas. I hope I genuinely hope that it is obviously a path on the trade side towards more things because I do strongly take the view that I'm afraid if we can rebuild trade with the EU because they are our largest trading partner that's a good thing.
Thank you. Dr. Dhingra, I wanted to ask you about the trade agreement because in your hearing, previous hearing and in your questionnaire, you wrote in quite some detail about the complexity of understanding the impact of Brexit, the multi-layered impact and the timing of Brexit in relation to the pandemic and the Russian war in Ukraine. So, could you let us know whether you feel as though the agreement is making that position clearer going forward?
I think so. So just to give a little bit of background when I was asked in the last hearing, we had just about come out of the Ukraine war and it was still the earliest the latest data we had at that point was 2022 and compared to then to when we did the stock take in the MPR as well as now we've got a lot more information but we're still very limited in terms that there is no granular trade data that is available post 2021. That's a very serious issue other than the one that you can see on goods exports from the HMRC. So, but I can still summarize for you what we have learned from the aggregate statistics as well as more generally from the granular data that does exist. So, the first thing to note is that the Brexit referendum left us in a weaker position that was largely driven by the sterling depreciation effects which came through both in terms of prices for intermediates as well as prices of what the consumers have to pay. So that's something which set us back. So we went into the pandemic much weaker than most economies would have been at that point. Then comes the period when the TCA when we're still deciding what the shape of the new TCA would be and that was a period of serious uncertainty in the economy and that shows up in weaker business investment in the country compared to say peer countries that we could look at. Now come to the point when it's post-TCA and the Ukraine wars happened. The biggest challenge was how do you actually tease apart these effects which are from the Ukraine war, the pandemic and Brexit. And I think at this point most of the analysis that's been done has been of the type that can we see what happened in some of the more restricted goods exports. What has happened in some of the more restricted services exports and a lot of our work sort of more broadly amongst the people who work on international trade in the country is generally that it hasn't opened up the kinds of new products the kinds of new markets that there had been some hope might be what would come out of the TCA as well as more generally other trade agreements. If anything it set us back quite a bit in terms of openness and where does that show up? So the numbers out there and I'm more on the sort of middle of somewhere of these numbers which is that goods exports have fallen by 13% in one case. If you look at the detailed HMRC data if you compare with peer countries as well with more updated data from 2023-24 the number is going to start looking much bigger in the order of 25% or so. And if you look at some of the newer work that we're doing on services exports, I think you can really tease apart what the TCA impacts are because we've actually codified the TCA and where the reservations come in and where the restrictions don't come in. And you do see that the restrictions have led to a reduction in services exports even though with such a services superpower and there's been a worldwide services export boom we've lost market share and I think those are the things which when you talk about these trade deals I think this is where they really can make a difference that a lot of it is about trade costs that will come into being some point in the future and if we can try and stem that tide that is where productivity starts to go up.
And have you at this point been able to estimate the extent to which the agreement from last month has stemmed that tide?
Not quite because I think it's far too early to talk about that. If you look at the basic numbers that say the HMT or the Department for Business and Trade have given out, they're somewhere in the range of about you would add about a little less than half a percent of GDP forever on in about 10 years time. So these are fairly long periods. So that being said I should mention unfortunately trade models do give you very small numbers and we tend to think that these gains are actually much larger than that.
So, so would it be fair to say that the reduction in productivity estimated from the trade and cooperation agreement has had an impact that is still having an effect on our economy now and that the recovery to characterize it as such will take longer than perhaps the initial impact.
I think so. I think we can say that we went in looking weaker and when we've come out of the pandemic, we haven't recovered as fast as many of the other economies. That's not to say that we didn't have a much bigger energy supply shock than most other countries, but I think still there is a contribution that is coming from the fact that we're a less open economy and we've always been excellent at being an open economy.
Thank you. I wanted to ask Miss Breeden about how the impact of the UK EU arrangements have perhaps affected our stability in relation to the US tariffs.
Just so I can check your question, Ms. Blake, it's to understand how the developments in the UK and Europe affect our relationship with the US.
I'm not sure I've got a terribly good answer to that question if I'm honest. Miss Blake, what I would describe it as is that the Europeans and the UK are facing similar challenges in their dialogues in pulling a trade deal together with the US. Obviously, the UK has been able to pull one together more quickly. It was the first one that the US signed. Perhaps that has obviously been supported by being not a member of the European Union.
And thank you Dr. Mann. I wanted to ask your assessment of the UK EU trade arrangements now and the impact that they might have on our stability compared to our previous relationship in relation to the US tariffs.
So there are a couple of different pieces of that one regarding financial stability and one regarding a real side effect or inflationary effect coming through the tariffs. So on the tariffs there's still uncertainty about how the policy will ultimately play out. And so its implications for growth and for inflation are uncertain. I do want to pick up though on a point that was part of a discussion earlier on how the path of inflation may be affected in the UK from global developments on tariffs. So there is a view that the US-China tariff war and other tariffs that are being implemented on other countries will precipitate overall lower international prices and in principle the UK could enjoy those lower international prices. I think of that as that is the effect that comes at the dock meaning suppose it comes on a boat for example that's at the dock however what the prices that a consumer faces or a household faces is on the shop shelf and there are quite a few additional players transportation advertising inventory storage domestic costs between the dock and the shelf. And so even though international prices may have a disinflationary impact on the UK, how the domestic aspects of pricing play out is very important for what kind of disinflationary effect we see at the final consumer or household end. My view is that there's less of a disinflationary impact than what we assume in our models that don't really take account of all of the channels from the global prices to the domestic shelf. So that's one aspect that I think needs to be considered. On the financial side I think that it's still premature to determine the outcomes of the tariffs on global markets. We still see a lot of volatility. And I've already talked somewhat about that how that volatility plays into my assessments of appropriate monetary policy.
Thank you very much Dr. Mann. Thank you. Thank you very much Miss Blake. Over to Dr. Jeanne Sander.
Thank you chair. Dr. Dhingra, I want to speak about the impacts on inflation at the moment. We know that energy prices are leading to a rise in inflation, but particularly how energy prices are impacting core inflation indirectly. Could you set out your views on that?
Sure. So, a lot of what I planned to do when I came for my first hearing here was to think about the supply chain and that's largely where my background is from. And I think what I was probably surprised to find which I wasn't aware of before I started any of that analysis was how dependent we are on energy and imports as well as not just directly but indirectly. So to give you a sense of the numbers 3 and a half percent was the number that was quoted all the time saying that this is the energy shock. That's how much 3 and a half percent is our consumption basket that is reliant on energy. Once you add in the fact that we're buying domestic bread and that bread itself has energy contained within it, you start to look at a number which is in the range of 8 and a half percent. If you compare it with the Euro area, that number is about 5%. So we're talking about much greater exposure. Now once you start adding in imports into the mix, so not just energy but also other imports that we buy from abroad, that number is somewhere in the range of 36%. So we're talking about that number which we usually look at which is 15% almost sort of doubles or a little bit more than doubles in this case. So I think that is really where a lot of the impact on inflation still is even though so till the last moment when I could do this analysis which is before the PPI series was stopped is the end of 2024 and by then so just to give you some context in 2022 11 percentage points of the 17 percentage point rise that had happened between 2019 and 2023 was to do with the energy and import basket. If you then fast forward to the end of 2024, that number is somewhere in the range of nine out of 24 percentage points of that rise that's happened since 2019 in the aggregate price level. So we're talking about still almost a third of what you're seeing in terms of inflation is really to do with imports and energy still sort of having a role to play. So I think we can't sort of lose sight of the fact that some of these things are fairly sticky and as they pass through the supply chain that takes time. Last time Dame Harriet Baldwin asked me about how long that takes. I think roughly in the range of anywhere between when it shows up in terms of firm prices to when it shows up in terms of consumer prices is one to two quarters roughly around there.
I have a very quick clarification question. You spoke about basically imports and goods did your analysis also include for example the impact on services so I go to a restaurant and there's more energy prices are higher therefore the price sticker price is higher there that also include that?
