Greene: BoE can't wait for second-round inflation effects

Greene's comments give fresh weight to the hawkish faction of the MPC and back up market expectations of a November rate increase, which recent reports have put at roughly 84%. The energy shock from the Iran war is directly relevant to her warning about second-round effects: if rising oil and diesel costs work through into wages and pricing decisions, the argument for moving toward tighter policy grows stronger, which keeps short-dated gilt yields and sterling tethered to energy prices. At a moment when global bond yields are already high, her words add additional pressure to the gilt market. Whether her stance wins broader support on the committee will hinge on the UK wage and inflation numbers coming next.

Her message is straightforward: waiting until inflation turns up in pay and prices would mean the Bank has already fallen behind, so action has to come sooner.

Summary:

• Megan Greene, a Bank of England Monetary Policy Committee member, considers UK monetary policy not especially restrictive.
• Acting only after second-round inflation effects materialise, she cautioned, would leave the Bank too late.
• She views being insufficiently proactive on inflation as the greater risk, not raising rates too soon.
• The latest IMF forecasts for the UK, she said, came as no surprise.
• At recent meetings, including September, she has voted for a rate hike and was one of three members outvoted by a majority that wanted to hold.

Megan Greene, a Bank of England policymaker, said the UK's monetary policy stance is not all that restrictive, and cautioned that the central bank would be responding too late if it waited until second-round inflation effects were visible.

Greene, an external member of the MPC, said she regards the bigger risk as not being proactive enough in fighting inflation, rather than increasing interest rates prematurely. A second-round effect arises when an initial price shock, such as higher energy costs, is passed into wages and wider price-setting, which makes inflation harder to shake off.

Her remarks underline her place among the more hawkish members of the committee. At the July and September meetings of the Bank, Greene backed a quarter-point rate increase and was part of a three-member minority, with the majority opting to hold.

Greene has been pressing the same point in recent days. Last week she said she anticipated some second-round effects from the current inflation cycle in the UK and raised concerns that wage growth of around 3.5% next year would be worrying, as higher prices could then find their way into pay negotiations and prompt firms to push prices up again.

The International Monetary Fund's latest forecasts for the UK did not take her by surprise, Greene said. This week the IMF increased its UK growth projection for 2026 to 1.3%, attributing the upgrade to stronger investment related to AI, and warning that the global outlook carries substantial risks from the war in the Middle East and high energy prices.

Britain, like other big economies, is wrestling with inflation driven by higher oil and diesel prices after the conflict involving Iran. Policymakers in the act-early camp argue that if those costs become locked into wages and inflation expectations, the eventual tightening needed would be considerably more severe.

Money markets have been progressively pricing in a rate hike for November, and Greene's remarks suggest she will keep pressing for tighter policy. The coming UK wage and inflation figures will determine whether she can build broader support on the committee.