In a cautious assessment, Megan Greene, a member of the Bank of England’s Monetary Policy Committee, has warned that faster interest rate cuts in the US could potentially slow down the UK’s own monetary policy tightening process, raising concerns about the impact on domestic inflation.
Speaking at an event hosted by the Resolution Foundation think tank, Ms. Greene highlighted the interconnectedness of global economies, stating that as a “small and open economy,” the UK’s prices are “likely to be influenced by price dynamics abroad.” She noted that the sheer size and influence of the US economy has led to the “conventional wisdom that other central banks must ‘follow the Fed’,” referring to the US Federal Reserve.
However, Ms. Greene argued that there is a “strong case for the Bank of England doing exactly the opposite.” She explained that if the Fed were to cut rates more aggressively than the Bank of England this year, it could lead to a rebound in US demand for UK exports, thereby exerting upward pressure on UK inflation.
“If this were to materialise, then it would – all else equal – push up on UK inflation,” Ms. Greene said. “This would, in my view, give even greater cause for concern about a risk of UK inflation persistence over that of weaker demand, warranting a slower withdrawal of monetary policy restriction in the UK.”
The comments come amid ongoing pressure from US President Donald Trump, who has repeatedly called for the Fed to cut interest rates at a faster pace. The path for US interest rates could partly depend on who is chosen to succeed the current Fed chairman, Jerome Powell, whose term ends in May.
On the topic of inflation, Ms. Greene said she was less concerned about the risk of disinflation than she had been a few months ago, largely due to policy measures in Chancellor Rachel Reeves’ autumn budget, including a £150 cut to the average household energy bill from April. However, she maintained that she would be “watching household and business inflation expectations” in the months ahead to ensure they come down in line with the inflation readings.
“Even more concerning, in my view, are the forward indicators for wage growth,” Ms. Greene added, noting that while private sector wage growth has been declining, the Bank’s outlook for the year ahead is that “this decline may have run its course.”
