Speech
Introduction
The conflict in the Middle East has generated significant volatility and financial market repricing in the UK, relating to uncertainty around the evolution of the conflict, the outlook for UK inflation, and our monetary policy response. Financial conditions are an essential mechanism through which monetary policy transmits and therefore form an important input into my monetary policy decisions. In this speech, I will evaluate the information that financial conditions provide about the current monetary policy stance and transmission, and carefully examine what they reveal about the types of risks driving recent moves.
Financial conditions
Let me start with a headline indicator of financial conditions, which summarizes how a broad range of asset price movements contribute to changes in nominal and real financial conditions. The effect of policy tightening since 2022 on nominal financial conditions in the UK is clearly visible, as the pink line in Chart 1 shows. Despite a modest loosening over 2025, this measure of nominal financial conditions resumed a slight tightening since the escalation of the conflict in the Middle East on account of higher short and long-term nominal interest rates.
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