Bank of England policymaker Megan Green said underlying inflationary pressures in the UK were too high, while defending a cautious approach to interest rate cuts.
Green confirmed at an event held in London yesterday, Monday, that inflation is declining, but the battle to keep it on the right track is not over yet.
“Inflation in the services sector has not fallen as quickly as I would like to see,” she said. “Wage growth is higher than we would like to see for the 2% inflation target. There are some risks that could make wage growth steadier than we hope, and therefore inflation in the services sector.” “And overall inflation may be more stable.”
“The risk of an early or aggressive cut is greater than a little slowdown,” she added.
The comments reinforce her position as one of the more hawkish members of the Monetary Policy Committee, which has cut interest rates only twice this year and signaled that it is in no rush to move monetary policy out of restrictive territory.
Her support for cutting interest rates by a quarter of a percentage point this month was her first vote in favor of cheaper borrowing since joining the nine-member interest rate-setting committee more than a year ago.
Green was speaking two days before official figures were expected to show inflation rising above the 2% target last month, driven by higher energy prices. Policymakers are expected to focus on the services sector to ensure that underlying price pressures are moderate.
The Bank of England and many economists expect services inflation to remain stubbornly high at around 5%.
Governor Andrew Bailey and other officials are expected to reinforce their firm message on interest rates when they appear before lawmakers on Tuesday.
They are sure to be questioned about the expansionary budget announced by the new Labor government on October 30 and Donald Trump’s plan to impose tariffs on goods exported to the United States.
Both cuts threaten to complicate the Bank of England’s task of maintaining price stability.
Traders have almost ruled out another cut in December and are only factoring in two more cuts by the end of 2025 with a 60% chance of a third cut. This would see the Bank of England lagging slightly behind the Fed’s easing cycle and well behind the European Central Bank.
Green made her comments at 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 businesses suggests wage growth may end up being closer to 4% than 2%. At the same time, the budget will add to inflation.
She explained that a significant rise in corporate payroll taxes would push up the cost of labor, although it remains unclear how companies will respond.
Companies “may go ahead and push higher costs to end users, so that would entail higher prices. Companies could also respond to this by cutting back on employment, or they could just reduce hours,” Green said.
