BoE's Mann says UK markets have priced in greater risk premium since Middle East conflict intensifies.

Given rising upside risks to inflation, a risk management strategy to monetary policy is appropriate. When there is uncertainty about inflation dynamics and second-round effects, raising Bank Rate to commit to the inflation target can help ensure a sustainable return of inflation to the 2% target, with smaller losses to economic activity. With the ‘sporadic continuance’ of the conflict in the Middle East, uncertainty around the outlook for the economy and inflation risks have remained elevated. Uncertainty about the MPC reaction function should not compound the problem. When a policy decision deviates from the collective, speeches such as this can provide additional clarity on the outlook, risks, and decisions. Cannot take comfort from tighter nominal financial conditions when much of that tightening reflects a higher inflation risk premium and, possibly, a monetary policy uncertainty premium that our own decisions and communications may have contributed to. These premia raise nominal yields without necessarily tightening the real financial conditions that matter for demand and inflation. In her view, real financial conditions are insufficiently tight. The appropriate response therefore is not to rely on risk premia to do the work of policy, but to reduce inflation risk and policy uncertainty through a clearly communicated reaction function and a sufficiently restrictive path for Bank Rate.