(Bloomberg) -- Bank of England policymaker Megan Greene said underlying inflation pressures in the UK are too high for comfort as she made the case for a cautious approach to cutting interest rates.
Speaking at an event in London on Monday, Greene said inflation was coming down but the battle to keep it on track is not yet over.
“Services inflation hasn’t been coming down as quickly as I’d like to see,” she said. “Wage growth is higher than what we would like to see for an inflation target of 2%. There’s some risk that wage growth might be stickier than we would hope, and consequently services inflation and overall inflation might be too.”
“The risk of cutting too early or too aggressively is a greater risk than going a bit more slowly,” she added.
The comments cement her status as one of the more hawkish members of the Monetary Policy Committee, which has cut interest rates only twice this year and signaled it is in no hurry to take monetary policy out of restrictive territory.
Greene was speaking two days before official figures are forecast to show inflation climbed back above the 2% target last month, driven by higher energy prices. Policymakers are expected to focus on the services sector for confirmation that underlying price pressures are moderating. The BOE and many economists expect services inflation to remain stubbornly high at around 5%.
Governor Andrew Bailey and other officials are expected to reinforce their steady-as-she-goes message on rates when they appear before lawmakers on Tuesday. They are certain to be grilled on the expansionary budget announced by the new Labour government on Oct. 30 and Donald Trump’s plan to slap tariffs on goods exported to the US, which has triggered fears of a global trade war. As an open economy, the UK is increasingly vulnerable to external shocks, Greene said.
“Historically speaking, about a third of the moves in our curve in the UK were influenced by things happening outside the UK. Now it’s about half,” she said. “We’re all tied to the drunken dragon of the US Treasury curve, and that’s certainly true for a small economy like the UK. And so that poses a risk as well, particularly given geopolitical events and given possible economic policies coming from across the Ocean with a new president elect.”
Greene made her comments in a discussion on the future of inflation hosted by the London School of Economics, the European Institute and the Official Monetary and Financial Institutions Forum.
She said feedback from firms suggests wage growth could end up being closer to 4% than 2%. The budget meanwhile will add to inflation. A big rise in payroll taxes for firms, together with another hike in the minimum wage, would push up the cost of employment, though it remains unclear how companies will respond, she said.
Companies “might go ahead and push higher costs through to end users, so that would involve higher prices,” Greene said. “Firms could also respond to this by reducing employment, or they could just reduce hours worked. They might invest in capital instead of labor, so you might have an increase in productivity. Or they might just simply let it eat into their margins.”
Traders have all-but ruled out a further rate in December, and are only fully pricing in two more reductions by the end of 2025 with a 60% chance of a third. That would leave the BOE marginally trailing the easing cycle of the Federal Reserve and well behind the European Central Bank.
(Updates with comments about external shocks.)
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