A NEW FISCAL-MONETARY ACCORD

A NEW FISCAL-MONETARY ACCORD? Dario Perkins 27 Jul 2026

The Bank of England is offering the new UK prime minister, Andy Burnham, a special deal. If the government delivers fiscal consolidation, the Bank will cut interest rates. It’s a modern spin on Rubinomics, the Clinton-Greenspan accord of the mid-1990s. And it’s a deal the “King of the North” should take. In fact, there are lots of countries that should be contemplating something similar. It would be v bullish for markets. But this aint the 1990s, and Rubinomics 2.0 probably wont happen.

1/6 As a rule, I try not to read too many Bank of England speeches. Not only are they very gloomy, but you rarely come away with any concrete policy implications. As much as Kevin Warsh’s war on CB transparency is irritating, it is more annoying to read nine completely different BoE versions of forward guidance every month. But Catherine Mann’s latest speech stood out, especially if you read between the lines. She appears to be offering the new UK govt a deal. Tighten fiscal and we will cut rates.

2/6 Earlier in her speech, Catherine Mann pinned part of the blame for the UK’s sticky inflation rate on fiscal policy, and the fact that the government has been running persistent budget deficits. She highlights public sector wages – which are now comfortably outstripping private pay gains – and the government’s contribution to overall GDP. She has a point. Over the past year, public sector GVA has been responsible for around half of Britain’s (dismal) economic growth rate.

3/6 But zooming out, I would put a slightly different spin on these statistics. While the contribution from the government is a bit larger than in the past, the real issue is the weakness of the private sector. Without fiscal deficits, the UK would be flirting with outright recession. This tells me, not that fiscal policy is wildly too loose (though it probably is…) but that monetary policy is extremely tight. The BoE is slowly squeezing the life out of the UK economy.