BOE’s Greene Calls for ‘Cautious’ Approach to Rate Cuts
(Bloomberg) -- Bank of England policymaker Megan Greene said she prefers a “cautious, steady-as-she goes” approach to cutting interest rates, warning of the threat from strong wage growth and economic activity.
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Greene said in a speech on Wednesday that she wants to be certain that the danger of permanent changes in price and wage setting has passed before she can support a quicker loosening in policy.
She echoed Governor Andrew Bailey in calling for a “gradual approach” to reversing the central bank’s most aggressive tightening in decades.
The comments from one of the BOE’s more hawkish rate-setters may reinforce market skepticism that the Monetary Policy Committee will move to successive rate cuts later this year. Greene, who opposed the quarter-point reduction delivered in August, today said inflation in the services sector remains sticky.
“I believe the risks to activity are to the upside, which could suggest that the long-run neutral rate is higher and - all else equal - our stance of policy isn’t as restrictive as we had thought,” Greene said, echoing comments from fellow BOE hawk Catherine Mann last week. “Given this risk, I believe it is appropriate to take a gradual approach to removing restrictiveness.”
Money markets are fully pricing in another cut in November, but put the chances of a follow-up move in December at around 60%. Sterling was down 0.3% at $1.3375 following Greene’s comments, after hitting its highest in over two years on Tuesday.
Speaking at the North East Chambers of Commerce in Newcastle. Greene cautioned against reading too much into falls in services inflation this year, saying that an underlying measure stripping out volatile components has been “stuck” between 4-5% for the past year.
“It’s certainly moving in the right direction but I wouldn’t get too excited,” she said in a Q&A following the speech. “We’re not surprised that it’s sticky. The biggest component of services inflation is labor, so as wages come down, hopefully inflation will come down.”
The MPC voted 8-1 to leave rates unchanged at 5% last week, emphasizing the need for patience after cutting for the first time since the pandemic in August. It has three scenarios of the threat that inflation still poses, including one where inflationary pressures are more ingrained in the UK economy and wage and price setting are affected.
Greene said that she is looking for evidence that this risk is “diminishing.” However, she said that the probability of a more benign scenario, where economic slack is needed to bring inflation down, is “growing.”
Greene’s speech focused on consumption in the UK and whether this will rebound as borrowing costs fall, forcing the BOE to keep policy in restrictive territory.
Spending has been surprisingly weak given incomes have been recovering in real terms in the last 12 months, she said. Consumers have pulled back on big-ticket purchases and are “parking much of their higher real incomes in savings.”
(Adds comments from Q&A)
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