BoE’s Greene warns of higher neutral Rate, supports measured easing approach

BoE MPC member Megan Greene emphasized the need for a “gradual approach” to easing monetary policy in her speech today. She highlighted that her recent vote to hold the Bank Rate at 5% in September, following a 25bpps cut in August, aligns with this stance.

Greene outlined three key economic scenarios influencing inflation and policy decisions.

In the first scenario, global shocks fade, allowing inflation pressures to ease with “less restrictive” policy. In the second, some “economic slack” is needed to bring inflation back to the target sustainably. In the third, structural changes affecting wage and price-setting could require monetary policy to remain “tighter for longer”.

Greene sees the second scenario as the most likely, where slack in the economy will be needed to tame inflation. However, she warned that there is a “higher risk” of the third scenario playing out, suggesting that the neutral interest rate could be higher than previously thought, meaning that current policy may not be as restrictive as anticipated. Greene noted, “I believe the risks to activity are to the upside,” which could require maintaining higher rates for longer.

She will monitor data to confirm whether the third scenario risk is decreasing and the second is becoming more likely. Until then, “steady-as-she goes approach to monetary policy easing is appropriate,” she added.

Full speech of BoE’s Greene here.