Bank of England monetary policymaker Megan Greene said interest rates will need to remain higher for longer to control inflation and that the structure of the UK economy may have changed since the Covid-19 pandemic.
Greene, who joined the BOE’s nine-member Monetary Policy Committee in August, said recent data showing a drop in inflation to 4.6% and weakening in wage growth was “good news.”
But she added that she was still worried about persistence in inflation, which appeared to be evident in the services component of the Consumer Prices Index. Wage growth was still “incredibly high,” she added.
“If we have an economy with fairly low productivity growth and really high wage growth, it’s going to be hard to hit the (2% inflation) target,” Greene said in an interview Thursday on Bloomberg TV.
The remarks signal that Greene, who has voted for higher interest rates at each of the three MPC meetings she’s attended, remains one of the BOE’s hawks despite a sharp drop in inflation. While she was careful to avoid pre-judging her next decision in December, she said her main concern at the moment is that inflation will persist and become “de-anchored” from the 2% target.
She pointed to increased spending across the world on defense and green investment as evidence that the structure of the economy has shifted. That, she said, may have boosted the “neutral rate” of interest — or the level of rates needed over the long term to keep inflation at the 2% target. Those factors point to interest rates that may need to remain elevated above levels prevailing in much of the past decade, she said.
“The notion that the long run neutral rate might be a bit higher and, the natural rate of unemployment might be a bit higher, isn’t something everyone’s grappling with,” Greene said. “But it just suggests that the world’s going to look a little bit different once the dust all settles than it did before the pandemic. It suggests we might need to be restrictive for longer.”
Greene has voted at three MPC meetings, each time opting for a quarter-point hike. The first of those times she was in the majority, but at the latter two meetings has found herself in a dissenting group of hawks while the majority opted for a pause in the BOE’s tightening cycle.
Markets, she said, haven’t absorbed the message the BOE is delivering on rates remaining elevated.
“Markets have shown significant push-back against the messages that all the major central banks have been offering over the past year or year and a half in this rate-hiking cycle,” she said.
A dual UK-US citizen, Greene formerly served as global chief economist at the Kroll Institute. She hinted before her first vote that she would back further rate hikes. In her appointment hearing before Parliament in June, Greene said the BOE needed to “lean against” the risk of persistence in price pressures.
She said getting inflation down from 10% to below 5% was easier than the next part of the battle in suppressing it back to the 2% target. That, she said, will require a loosening of the labor market but not necessarily a sharp rise in unemployment.
“We will need to see the labor market loosen more to see incredibly high wage growth come down,” Greene said. “There are signs of the labor market weakening without a significant uptick in unemployment. Actually it’s remarkably low given where we are in the cycle.”
In a column for the Financial Times a month later, Greene also warned that interest rates may settle at higher levels than before the pandemic as investment in green technology and artificial intelligence boosts growth and productivity.
This puts her at odds with BOE Governor Andrew Bailey, who has repeatedly said he sees no reason why so-called R* should not return to pre-Covid levels.
It isn’t just R* where Greene’s views differ from her colleagues. Her take on interest rates and inequality are also in contrast to those of Swati Dhingra, one of the MPC’s most dovish members. While Dhingra has raised concerns that higher rates hit lower-paid and younger workers the hardest, Greene — who is currently writing a book on the “new drivers of inequality within developed economies,” has been content to push for rate hikes.
--With assistance from Philip Aldrick and Andrew Atkinson.
(Updates with comments from the interview.)
Author: Lucy White, Tom Rees and Francine Lacqua
