Bank of England Policymaker Megan Greene Talks UK Outlook
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Bloomberg Audio Studios. Podcasts. Radio. News. Now, a darkening global economic backdrop has opened the door to quicker rate cuts from the Bank of England. That's as officials eye the impact of Trump's tariffs, a cooling labor market and tumbling energy prices. Now, markets are fully pricing three quarter points reduction this year and a 50 percent chance of a fourth with a cut next month. All but certain. Well, joining us now for an exclusive interview is Megan Green, member of the

monetary policy committee at the bank of england and welcome also to our radio listeners megan as always thanks so much for giving us a little bit of your very busy schedules now markets um are now getting conviction that the boe will you know probably deliver another rate cut next month and more than three rate cuts by the end of the year how comfortable

are you with that pricing? Look, market pricing has moved around a whole lot over the past couple of weeks. And it's also worth pointing out that not all of that is focused on what's going on in the UK. So traditionally, about a third of the moves in the gilt curve have been driven by things happening outside the UK.

these days it's about half that's been driven by things happening outside the UK. So part of those moves I think reflect what's going on globally and you know we're just about to go into an interest rate round so we'll have to see but I would highlight that those market moves don't all reflect the fundamentals in the UK. Because of uncertainties? If you look at, you know, there seems to be a lot of disinflationary kind of impact from falling energy prices, weaker dollar, tightening financial conditions, global demand.

Does that point to a cut in May?

So there are factors that are both inflationary and disinflationary. I'm particularly concerned. We've had weakness in output for about nine months now, and we're trying to figure out what the big driver of that is, whether it's demand or supply driven. I think there are reasons to think it's both, actually. But I'm more concerned about the supply side, and that actually on balance would be inflationary. So that's part of it. When it comes to tariffs and the developments over the past couple of weeks,

there again are both inflationary and disinflationary impulses so when it comes to tariffs in particular for the UK we're a small open economy right you know the US is our biggest single country trade partner but the EU of course is our biggest trade partner overall

So if you have export substitution, then that would tend to push down on growth and inflation. If you have trade diversion from other countries that are trying to find a new home for their markets, that also pushes down on inflation. But we saw during the pandemic that if you have a repatterning of supply chains, that can push up on inflation. And also if we have trade fragmentation writ large,

then that tends to reduce knowledge spillovers. That reduces potential growth. That tends to be inflationary. So something you've mentioned was exchange rates. And those have not gone as the economic theory would suggest. Normally, if the U.S. announces or imposes unilateral tariffs on other countries, the theory suggests the dollar should appreciate. The opposite has actually happened. And so that in and of itself could...

be disinflationary for the UK, but of course as I mentioned the EU is the UK's biggest trade partner and the Euro has appreciated. So net-net if you look at the kind of sterling exchange rate index, the pound's up a little bit. There's a ton of uncertainty around this, but there are both inflationary and disinflationary forces. But are you concerned about the slight recent strength in pound? Does that change actually tightening financial conditions?

So it does. I mean, the currencies have been moving a lot recently as well. We've also seen off the back of previous kind of structural shift after the global financial crisis, after COVID, the dollar didn't always behave immediately, as the theory would suggest. It weakened and then subsequently rebounded. So I think it's a bit too early to say kind of where the dust is going to settle on currencies. But I will say if the dollar continues to depreciate,

On balance, that would be disinflationary for the UK. And if the opposite happens, less so. So are you worried? And you said in the past, actually, that there's a danger that it could muddy the water on inflation, the moves in pounds. So are you worried that there could be a reverse and then it becomes an upward pressure on inflation quite quickly?

It could be. That's right. You know, currency forecasters have the hardest job, second only to energy forecasters. And like I said, it's been really volatile. We're not quite sure where the dust will settle. If the pound were to strengthen more, actually, then we'll be importing disinflationary forces. If the pound were to depreciate, then the opposite would happen. So it just underscores the amount of uncertainty that we're looking at, given that we are

facing our policy now on where we expect the economy to be in a year and a half, two years time. It's pretty difficult. And how do you see domestic policy actually impacting behavior? For example, you know, the next policy in terms of companies, but also consumers.

Yes, so the combination of the NICs and the increase in the national living wage is something we've been looking at a lot. We've asked companies through our agency network how they plan on adjusting in response to that. And we've also looked at other surveys that have been done. There are a number of different margins of adjustment. So you could decrease employment, you could decrease hours, you could offer lower wage increases.

you could have it eaten to profits, you could boost productivity. When we ask firms how they plan on responding and lay those out, they basically say yes, we're going to do those. And so it's a bit too early. It just kicked in in April, right? It's a bit too early to say exactly what the margins of adjustment are. So far, it seems like eating into profits will be the most immediate one, but further down the line, it could end up

feeding through into kind of labor quantities and that's a concern of ours certainly so we have incorporated the next in the national living wage into our inflation forecast it pushes up on inflation a little bit by about point two percentage points so that's not massive but it is something but you know the

The big risk, I think, is that there could be a shakeout in the labor market. We could see unemployment tick up. There are no signs of that yet, actually, even though the NICs and the National Living Wage have come to be. So it might be a bit too soon. We see in the kind of forward-looking PMI employment indices, they were really falling before. They weren't performing well, but actually in the most recent one, they've ticked up, which suggests...

A lot of that was around kind of sentiment around the next rather than actual expected behavior. Has the labor force dynamic changed actually for the worse since 2020? Since 2020. COVID. Yeah.

what we've seen is that the labor market has held up surprisingly well in the UK as it has across developed economies, right? So we have unemployment of around 4.4%. That's pretty low. I should provide a big health warning with our labor market data because the labor force survey hasn't been getting as many responses as it did pre-COVID. And that's been the case everywhere, but especially so in the UK. So it's hard to get a real read on the labor market. That

That said, we look at a bunch of other indicators and series. We have our own kind of indicator-based models. And underlying employment is growing pretty slowly. Unemployment is ticking up very slowly. We've seen the labor market weakening.

since COVID slowly again, not as quickly as one might have expected. And wage growth remains pretty high. Now that's wage growth according to the labor force survey again, and it's pretty volatile and actually ticked up at the end of last year. It's since started to come back down. But if we look at other metrics,

of wage growth, they're also pretty high. And that's important because that's a huge input into services inflation, which tends to be more domestically driven. And so that's something that we're looking at a lot. Services inflation in the UK is around 5%. It's much higher than other developed economies. And that's a sign that maybe there is some inflation persistence in the UK economy. I was going to ask you, what part of the UK inflation spectrum are you most worried about? Is it services or private sector wages?

So I would say I'm more worried about services inflation. It actually surprised on the downside more recently. And I should highlight that the disinflationary process is underway and continues to be underway as we see it in the data. I'm worried about services inflation, as I mentioned, because it is an indicator of domestically driven inflation, which we can actually do something about.

It's the biggest contributor to inflation in the UK. The biggest part of it is actually pay growth, which is why I'm also focused on wages. But one factor that feeds into wage growth, of course, is inflation expectations. And we've seen household inflation expectations rise.

And that goes for both short-term measures and medium-term measures. The latter is a bit more worrisome, actually. You don't usually see those rise. So I think they remain well anchored. We've looked at kind of the relationship between inflation expectations in the economy pre-COVID and come up with kind of bands of reasonable inflation expectations now and

where we are is within those bands, but towards the top of it. So it is something I'm looking at as another sign of inflation persistence. Everything seems to, you know, it's changing so quickly and the markets are changing so quickly. Is there anything that you're, you know, that you can confidently say will not change?

That won't change. We'll have a lot of uncertainty for a while is one thing. I mean, there is a lot of volatility. The markets haven't actually really responded as you would expect in the face of a risk-off environment and that amount of volatility. And so that does inject quite a lot of uncertainty. And there's policy uncertainty coming out of the U.S. as well.

I mean, I was looking at the 30-year borrowing cost for the UK around 5.35%. I mean, it's the highest they've been this century. Is that a message to policymakers from bond vigilantes or how do you see this? So it could be, but it could also just be a reflection on what's happening in the US in particular and a read over. That's what we've seen since COVID is that there's just significant read over automatically, even though the structure of the US and the UK economies are quite different.

Because the UK is a small, open economy, it does get dragged around by developments happening elsewhere. Yeah. How much, I mean, you know, we're trying to theorize about what the Fed does and when they can start cutting if labor goes down in like the third quarter. Is that when they start cutting aggressively? But what's your path for interest rate cuts in the next, you know, six to eight months for the Bank of England? For the Bank of England. So I have been on the more cautious side of our rate cutting cycle because of all these

indicators that there could be inflation persistence. There's also uncertainty. I do think there are risks on both sides, though, actually, so I'm also careful in our lingo. I think that the tariffs actually represent more of a disinflationary risk than an inflationary risk, though, and so we'll have to see how that develops going forward. Is there anything that actually... First of all, is it so difficult to know where the current neutral rate is? Yes.

Do you have an idea of where it is? Because that would be good to guide the markets towards that. Yeah, as you know, we use a lot of different methodologies to try to estimate the real neutral rates. We use financial markets indicators. We use surveys. We ask investors. We use macro models. And they all have massive bands of uncertainty. So I won't give you a point forecast. In February, we put out kind of our analysis on this and showed that...

depending on which methodology you use, the long-run neutral rate has probably gone up by between 25 basis points and 150 basis points. So that's a pretty wide band. But what we can conclude is it's probably gone up, and this is something I've believed for a while. So I think it's higher than where it was. When we ask investors, they say somewhere between 3.25% and 3.5%. I don't think that's totally unreasonable.

Megan, is there any case that the UK has a competitive advantage with the tariffs? Given they're at a baseline 10%.

which offers, I guess, more certainty for businesses than in the EU where they're still negotiating. Yeah, so again, we'll have to know when the dust settles, but the EU was given a lower tariff rate than many other countries. And so that does end up being a bit of a competitive advantage, particularly with respect to the EU. So we'll see what happens with the EU tariffs.

But if the UK does end up with lower tariffs than the EU, then you might have some kind of substitution. So actually, normally trade diversion, you think of it as disinflationary for the UK because you think of, for example, products coming from Asia looking for a market, you know, them offering lower prices to find access to the market. But actually, you could get trade diversion from the EU because the UK has lower tariffs. It all depends on how much substitution there really is.

when you look at the complex over the next couple of months is there a point where if tariffs come down say China or India

Does that give you hope for a more settled economic backdrop worldwide or is it still going to be messy? So I think there's going to be a lot of volatility in terms of policymaking regardless. I don't expect us to know exactly what the global trade landscape or financial landscape will look like any time too soon. I know there's, you know, we led the show actually talking about central bank independence because of what Donald Trump was saying about Jay Powell.

I mean, what's, you know, as a central banker sitting on the MPC, like, what's, you know, how does the BOE react to this? So, you know, credibility is the currency of central banks, and I think independence is quite an important piece of that. When we say we will hit our...

targets and the target for the Bank of England is provided by Treasury but we will hit our target I think we can do so credibly because we're free to make the decisions that we believe will most effectively achieve that and so I think central bank independence is absolutely crucial

Megan, thank you so much for joining us today. That was, of course, Megan Green, member of the Bank of England's Monetary Policy Committee, joining us for an exclusive conversation. How can you grow your business from idea to industry leader? Bring your vision to life with smart business buying tools and technology from Amazon Business. From fast, free shipping to in-depth buying insights and automated purchase approvals, they deliver everything you need to achieve your goals.

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