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BoE’s Greene warns inflation risks are rising as wage disinflation stalls
The slowdown in wage growth has stalled, Bank of England (BoE) Monetary Policy Committee (MPC) member Megan Greene indicated on Tuesday, suggesting that pay could start driving prices higher. She said that “wage disinflation has stalled,” pointing to renewed risks from salaries.
With the risks now “greater than we thought,” Greene reiterated her view that “We [the BoE] should proactively lean against the risk of second-round inflation effects,” stressing the need to act against those risks.
Speaking a day ahead of the UK inflation figures, she emphasised that the easing in wage growth appeared to have stopped at levels above the BoE’s goal.
Greene Highlights Persistent Wage Pressures:
The slowdown in wage growth has come to a halt
Still believe we should take proactive action against the risk of second-round inflation effects
Second-round effects pose a greater risk than we previously thought.
Pay growth nearer 3.5% is indicated by forward-looking data
The easing in wage growth appears to have stopped above levels compatible with inflation at 2%
Economic resilience has exceeded expectations
Slack in the labour market may already have peaked
BoE Policy and Sterling Explained
Responsibility for the United Kingdom’s monetary policy rests with the Bank of England (BoE), whose main objective is ‘price stability’: a stable inflation rate of 2%. To pursue this goal, it adjusts base lending rates. By setting the rate at which it lends to commercial banks and at which banks lend to one another, the BoE determines interest rates across the wider economy. The value of the Pound Sterling (GBP) is also affected.
Inflation above the Bank of England’s target prompts an increase in interest rates, raising borrowing costs for households and businesses. Sterling benefits because the higher rates make the UK a more appealing destination for international investors’ money. By contrast, below-target inflation signals slower economic growth. The BoE will then consider cutting rates to make credit cheaper, hoping to encourage businesses to borrow for projects that support growth. Such a move is negative for the Pound Sterling.
When rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. This policy substantially expands the flow of credit through a financial system that has become stuck. Under QE, the BoE prints money to purchase assets from banks and other financial institutions, generally government bonds or AAA-rated corporate bonds. The usual result is a weaker Pound Sterling.
As the economy strengthens and inflation begins to rise, Quantitative Tightening (QT) reverses QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. With QT, it instead halts further bond purchases and no longer reinvests the principal repaid when bonds in its portfolio mature. This is generally supportive of the Pound Sterling.
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