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UK Interest Rates Will Settle at Higher Level, Warns BOE’s Greene 

By Irina Anghel and Tom Rees
Megan Greene, member of the monetary policy committee of the Bank of England, during a Bloomberg Television interview in London, UK, on Thursday, Nov. 16, 2023. 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. (Hollie Adams/Bloomberg)

(Bloomberg) -- Bank of England rate-setter Megan Greene warned that interest rates will settle at higher levels than before the pandemic, adding to a growing consensus on the need for borrowing costs to remain elevated. 

Greene said in an interview on Tuesday that the long-run neutral interest rate — known by economists as r* — has “crept up,” a shift that has been “well digested” by markets. Her remarks point to a growing consensus among central bankers that rates will need to end up higher than the ultra-low levels seen before the pandemic.

While Green, an external member of the BOE’s Monetary Policy Committee, is one of the panel’s more hawkish members, her comments on the long-run interest rate echoed similar remarks by Bailey in recent weeks.

“We can debate how much, but the direction I think is likely in which case we’re not going back to the rates that we had pre-pandemic probably,” she said in an interview with the Atlantic Council. “Rates will probably have to end up a bit higher than they were.”

Greene’s appearance is one of several by BOE officials around international financial meetings in Washington this week that are being closely watched for clues about the bank’s next rate decision on Nov. 7. Governor Andrew Bailey also spoke at a Bloomberg event in New York on Tuesday, although his remarks were largely focused on financial regulation. 

Greene continued to emphasize the need for a cautious approach to easing policy, in contrast to the governor who recently suggested that the BOE could be “a bit more aggressive” with rate cuts if the good news on inflation held. She also warned that UK GDP growth exceeding just 1% is enough to drive up inflation, blaming the legacy of the financial crisis and a “dearth” of investment since Brexit. 

Greene said that the speed limit of the UK economy was “pretty low,” limiting how quickly it could grow without generating excess inflation. She was referring to the BOE’s estimates on potential growth, which suggest the economy will remain stuck in a low gear.

©2024 Bloomberg L.P.