Category: Monetary Policy

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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The Bank Underground Christmas Quiz 2025

Image of the Bank of England during Winter with partial snowfall.

Bank Underground is about to take a break for the festive season. In keeping with tradition, we are pleased to present the annual Bank Underground Christmas Quiz! This year, it’s been prepared with the kind assistance of the Bank of England’s Archive team. We hope you enjoy testing your knowledge of the Bank’s history, especially how it has marked Christmas in years past. We wish our readers a very happy festive season!

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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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The keys to house price growth

Arno Hantzsche and Harriet Jeanes

Houses account for the largest share of total assets held by the UK household sector. Households’ spending and saving decisions depend in part on the price of these assets. What causes house prices to move can therefore have important consequences for macroeconomic policy and financial stability. Our house price model decomposes movements in house prices into contributions from key economic drivers. Among these, measures of real household income explain much of their variation over time. The rise in mortgage rates during the recent tightening cycle is estimated to have kept house prices nearly 10% lower than had interest rates not moved, with some of this effect offset by real income growth.

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War and payment innovation: the adoption of paper currency in Britain

David Rule

Digital currencies and stablecoins have increased interest in how new forms of money are adopted. Looking to three episodes from the 1690s to the First World War, this post considers how paper currency replaced coin in Britain, an historical example of adoption of new money. The underlying drivers were not technological changes but wars, leading to actual or feared shortages of coin, and a need to take specie out of internal circulation in order to meet overseas outflows. The public authorities took the initiative and created trust successfully in the new money. This is the first of a series of planned posts by Bank staff on past payment innovations.

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When mortgage flexibility meets monetary policy tightening: heterogeneous impacts on spending and debt

Philippe Bracke, Matt Everitt, Martina Fazio and Alexandra Varadi

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.

How do mortgagors adjust spending, savings and debt during monetary tightening? In a recent paper, we explore this question using a novel data set on household transactions and mortgage records. About 30% of households used mortgage flexibility when facing higher borrowing costs since late 2021, as their fixed-rate contracts ended. Some extended repayment periods to lower monthly payments, while others increased borrowing by extracting housing equity – leveraging nominal price gains since the pandemic – to sustain spending and reduce unsecured debt. Those unable or unwilling to use mortgage flexibility, cut spending significantly. We thus document the dual role of mortgage flexibility at refinancing: it helps smooth consumption aiding financial resilience; but it may also dampen monetary policy transmission for some households.

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Muddled measurements on clarity

Charlie Warburton and James Brookes

Economists have repeatedly shown that readability of central banking communication matters. But they typically measure readability in a crude way – using the simplistic but influential Flesch-Kincaid metric. The Flesch-Kincaid Grade Level is based on word and sentence length and is commonly interpreted as the number of years of education required to understand a text. However, recent advances in computational linguistics toolkits empower us to consider finer-grained markers of language comprehension missed by Flesch-Kincaid. Here, we revisit Jansen (2011) which found that Fed Chair testimonies with lower Flesch-Kincaid Grade Level scores – indicating higher readability – were associated with lower market volatility. Our results show that compared to more sophisticated linguistic metrics, Flesch-Kincaid is a relatively poorer indicator of readability.

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What happens to inflation when we put a price on carbon?

Hannah Copeland, Lennart Brandt, Natalie Burr and Boromeus Wanengkirtyo

Emissions Trading Schemes (ETS) are an increasingly popular market-based policy to impose a price on carbon emissions (previously costless to the emitter) (World Bank Group (2025), DESNZ (2025)). With carbon prices expected to increase steadily, and sectoral coverage broadening, these schemes have gained the attention of monetary policy makers (Breeden (2025), Mann (2023)). But what are the implications for inflation? By constructing a new tool (a high-frequency identified ‘instrument’) to measure the impact of supply shocks in the UK carbon market, we document that a tighter carbon pricing regime temporarily increases energy prices and inflation, and decreases output. We find that this shock transmits through multiple energy-related commodity prices, including oil and gas, compounding cost-push pressures arising from the energy sector.

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