Monetary policy transmission: it’s all in the curve

Sofia Carollo and Natalie Burr

While monetary policy sets short-term policy rates, households and firms borrow at varying time horizons. How a policy decision reshapes the whole yield curve therefore matters. We trace the reactions of yields in narrow windows around UK monetary policy announcements across two dimensions: a ‘level’ surprise that shifts the entire curve and a ‘slope’ surprise that changes its steepness. We find that a level surprise affects CPI inflation more than a slope surprise does; this result is difficult to recover from surprises that conflate the two dimensions. So, the policy rate tells only part of the story: two curves considered equivalent from a stance perspective can lead to different inflation outcomes. Policymakers must be attuned to these differing effects.

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Is UK productivity growth low? A historical and cross-country perspective

Sophie Piton and Fabrizio Cadamagnani

A lot has been written about UK productivity and how weak it’s been in recent years. This post assesses UK productivity trends in a historical and cross-country perspective. Productivity growth has been weak across G7 economies over the past two decades, reflecting the end of the information and communications technology (ICT) revolution and the flattening gains from globalisation. The slowdown was particularly large in the UK, mainly because it experienced a larger decline in the share of manufacturing than peers and then because of the impact of Brexit. In recent years, US productivity growth has been accelerating thanks to tech, offering some optimism for the future of UK productivity.

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Canaries in the column? AI exposure and the UK’s hiring slowdown

Haley Schlicht

From Silicon Valley executives promising to automate white-collar work to headlines claiming AI is foreclosing the graduate entry market, the strained ‘low fire, low hire’ environment has increasingly been ascribed to technological transformation. UK vacancies nearly halved since their 2022 peak – a contraction so sustained it has reshaped the British hiring market for the better part of three years. This post examines how evidence of AI-driven transformation at the hiring margin is proving considerably more tenuous than the headlines suggest.

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Is artificial intelligence making us more productive? What the UK industry data show

Sandra Batten

Unlike previous waves of automation, machine learning and generative AI (Gen AI) technologies can perform non-routine cognitive tasks, such as those involving written or spoken language, and have the potential to affect a wider range of occupations. By augmenting or replacing workers in these tasks, these technologies promise to deliver significant productivity gains. AI adoption, while still limited, seems to be linked to productivity gains across industries in the US, although it can only explain a small fraction of the aggregate pick up in US productivity. This post examines the emerging evidence from UK industry data and finds some indication that AI is contributing to productivity growth following a similar pattern to previous key technologies.

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Generative AI: degenerative for jobs?

Edward Egan

Headlines warn of a looming ‘jobpocalypse’, but the reality is more complex. Rather than simply causing a wave of job losses, the economic literature suggests generative AI could influence the labour market through several – potentially offsetting – channels: productivity gains, job displacement, new job creation, and compositional shifts. The balance between these effects, rather than displacement alone, will shape AI’s aggregate impact on employment. The latest research suggests that overall effects remain limited so far, but there are some early signs of AI’s impact. I find that, since mid-2022, new online vacancies in the most AI-exposed roles have decreased by more than twice as much as the least exposed group. This highlights the need for ongoing monitoring as AI adoption accelerates.

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How does lower inflation uncertainty affect households’ financial behaviour?

Christoph Herler and Philip Schnattinger

Macroeconomic Environment Theme

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Macroeconomic Environment Theme which focuses on the changing infaton dynamics and unfolding structural change faced by monetary policy makers

The recent inflation surge has sparked concerns about how uncertainty over price dynamics shapes households’ financial behaviour. Often, lower uncertainty about inflation coincides with lower expected inflation – when inflation is low and stable, households feel more confident about future trends. In a new paper, Johannes J. Fischer, Christoph Herler and Philip Schnattinger employ a randomised controlled trial (RCT) to disentangle the effects of households’ uncertainty about inflation from the expected level. This disentangling is important: lower expected inflation can discourage immediate spending, while lower inflation uncertainty may push them towards spending more. We show that reduced inflation uncertainty leads to higher planned spending, lower saving rates, and a shift towards liquid assets with fixed returns.

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Trade fragmentation and inflationary pressures

Ludovica Ambrosino, Jenny Chan and Silvana Tenreyro

Macroeconomic Environment Theme

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Macroeconomic Environment Theme which focuses on the changing inflation dynamics and unfolding structural change faced by monetary policy makers.

Global economic trends have changed markedly over the past two decades. The global financial crisis represented a turning point, with trade openness plateauing and fragmentation steadily increasing before rising sharply during the pandemic and Russia’s invasion of Ukraine. Trade fragmentation is increasingly driven by national security concerns, the rise of ‘friendshoring‘, and the emergence of competing trade blocs. For policymakers, this raises a central question: how will trade fragmentation shape inflation dynamics, and what are the implications for monetary policy? A recent paper addresses this question by analysing trade fragmentation in a model where the inflationary effects depend on the adjustment of demand alongside supply.

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Once upon a time in the future: strategic foresight in central banks

Julia Giese and Jacqueline Koay

We live in an era of rapid change, complexity and uncertainty. Over recent years, severe global shocks have been frequent, with profound implications for our economy and financial system. Yet such shocks are impossible to forecast with any precision as they are not extrapolations of past relationships. Our economy and financial system are subject to longer-running trends such as technological advances, demographics, geopolitical shifts and climate change which can be blown off course or altered in unexpected ways. Where forecasts are bound to fail, strategic foresight tools can help as they are a means for practitioners to understand the dynamics of change (and how this could impact the economy and financial stability) by imagining different futures and telling stories around how trends might interact to give rise to unforeseen shocks.

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Boosted inflation – using machine learning to make sense of non-linear determinants of inflation

Marcus Buckmann, Galina Potjagailo and Philip Schnattinger

Disentangling the sources of high inflation, exceeding inflation targets in the post- pandemic period, has been a priority for monetary policy makers. We use machine learning for this task – a boosted decision tree model that fits non-linear associations between many indicators and inflation. We add economic interpretability by categorising the data into intuitive blocks representing components of the Phillips curve. To further disentangle inflation drivers, we separate the signals that reflect demand and supply by imposing sign-restrictions on the decision trees. Our model tells us that both global supply and domestic demand spurred UK CPI inflation post-pandemic. We detect important non-linearities: in the Phillips curve relationship with labour market tightness and unemployment and via additional effects from short-term inflation expectations.

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Forbearance lending as a crisis management tool

Isabelle Roland, Yukiko Saito and Philip Schnattinger

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Prudential Architecture Theme which focuses on the evolving regulatory structures and fresh strategic issues for regulators and supervisors.

Interventions in corporate credit markets have featured prominently in the policy response to crisis episodes over the last two decades. Loan forbearance features prominently among those interventions by lenders and/or regulators. It is a practice whereby banks grant temporary relief to struggling borrowers, to avoid default. On balance, the literature is critical of loan forbearance in the corporate sector because of its potential to contribute to zombification – a situation where bank lending keeps unproductive firms alive, resulting in lower aggregate total factor productivity. Results from our new paper show that forbearance lending in combination with business restructuring plans can provide temporary relief for struggling firms, safeguarding output and employment, without contributing to the zombification of the corporate sector. Note that our research is focused on the impact of forbearance on the corporate sector; the impact of forbearance on lenders is a separate question outside the scope of our paper.

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