BoE’s Greene: UK’s consumption puzzle warrants cautious, gradual monetary easing

In an article for the Financial Times, BoE MPC member Megan Greene highlighted the challenges facing the UK’s consumption patterns, describing it as a “consumption conundrum.” Despite real incomes rising for over a year and inflation expectations stabilizing near historical averages, real consumption remains only 1.5% above pre-pandemic levels—a situation Greene finds puzzling.

Greene pointed to three main factors likely contributing to the UK’s weak consumption and higher savings rates. Firstly, the cost-of-living crisis, driven by successive shocks like the pandemic and the war in Ukraine, has probably led to an increase in “precautionary savings.” Additionally, restrictive monetary policy has weighed on consumption, even as overall household income from interest on savings has risen.

Though it’s unclear which of these factors weighs most heavily on consumption, Greene warned of the risks on both sides. Stronger-than-expected consumption could lead companies to pass on higher costs, boosting inflation and requiring tighter monetary policy for longer. Conversely, weaker consumption could lead to below-target inflation, forcing the BoE to implement more rapid rate cuts.

Given these dynamics, Greene advocated for a “cautious, gradual approach” to monetary easing, balancing the need to manage inflation risks while providing support to the broader economy.