A consumption-driven recovery in the UK could set off a renewed bout of inflation, but more interest rate cuts are likely as prices are “moving in the right direction,” Bank of England policymaker Megan Greene said.
Greene, one of four external members of the BOE’s nine-strong Monetary Policy Committee, said she was watching closely for signs that UK companies will raise prices as the economy gathers steam. A robust consumer could be the trigger, she said.
“If we have consumption recovering more strongly than we expect, they might start feeling like they have pricing power once again and they might start passing through higher costs to end users in higher prices,” Greene said during a panel in Nashville at the annual meeting of the National Association for Business Economics.
She added that sticky services price inflation, which at 5.6% is still well above the BOE’s 2% target, was “worrisome,” but overall signs are good.
“We are moving in the right direction,” she said. “The question is how quickly we are moving there.”
Headline inflation in the UK has fallen to 2.2%, but the decline has been driven by a steep, temporary fall in energy prices.
Greene added that she believed the neutral rate of interest had risen since the inflation shock. Most estimates put the neutral BOE rate at about 3.5%, but she did not specify a number. The neutral rate is the level at which a central bank’s policy setting neither stimulates nor restricts economic growth.
Markets have reduced their bets on a BOE rate cut in November in the last few days. A second rate cut this year had been fully priced in but investors have lowered the probability in the last few days. The Organisation for Economic Cooperation and Development recently said the UK faced the worst inflation outlook within the Group of Seven club of advanced nations.
Greene is one the more hawkish members of the MPC, having voted to hold rates at 5.25% in August when they were cut to 5%. She was in the majority voting to hold rates in September. Last week, she said she preferred a “cautious, steady-as-she-goes” approach to monetary easing, pointing out that strong wage growth and elevated services inflation remain a concern.
UK retail sales have risen faster than expected in a sign that households are more willing to spend. Real wages have risen for more than a year now and the economy has been stronger than forecast. Greene pointed out that UK households have spending power as they have been saving.
“UK savings have been a drag on growth in the UK but they have boosted growth in the US,” she said. Greene was speaking after Federal Reserve Chair Jerome Powell said the Federal Open Market Committee “is not a committee that feels like it’s in a hurry to cut rates quickly” but that the slowing economy was easing price pressures.
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