External monetary policy committee member Megan Greene issued a significant warning on Thursday, highlighting the heightened sensitivity of UK households and businesses to inflation shocks after five years of above-target price growth, even as the Bank of England voted unanimously to hold rates at 3.75%. Greene’s comments, made in the minutes of the MPC’s decision, added an important dimension to the broader discussion of how the Bank should respond to the energy price impact of the Iran war. Officials warned that the conflict could push inflation above 3% and require rate hikes in the months ahead.
Greene’s observation reflects a structural concern about the UK economy’s current state. After years of inflation running above the Bank’s 2% target, driven first by the pandemic and then by the energy crisis, the public’s tolerance for further price increases may be limited. A new inflation shock driven by war in the Middle East could trigger stronger wage demands and expectations that make the shock harder to contain through monetary policy alone.
Governor Andrew Bailey acknowledged the sensitivity of the current environment. He said the Bank was closely watching how the Iran war’s energy price impact developed and stood ready to act if inflation threatened to become entrenched. His warning about petrol prices as an early indicator of the shock was paired with concern about the potential for household energy bills to follow.
Financial markets took a hawkish view of the combined communication. UK gilt yields rose, the FTSE 100 fell, and the pound strengthened against the dollar as traders moved to price in rate hikes before year end. The prospect of a June rate hike is now widely discussed in City circles, with a second possible move anticipated before December.
Greene’s warning adds to the picture of a committee that is alert to the risk of inflation becoming self-fulfilling if businesses and households react to the current shock by demanding higher prices and wages. That concern is likely to feature prominently in the Bank’s internal deliberations as it assesses how much weight to give to the energy price shock when deciding on future policy moves.
