BoE MPC member Megan Greene warned during an event overnight that services inflation remains stubbornly high, with wage growth exceeding levels consistent with the 2% inflation target. “There’s some risk that wage growth might be stickier than we would hope,” she said, adding that this could keep both services and overall inflation elevated.
Greene emphasized the importance of a cautious approach, stating that “the risk of cutting too early or too aggressively is a greater risk than going a bit more slowly.”
Feedback from firms suggests wage growth could settle closer to 4%, well above the desired level. Companies may respond to higher costs by increasing prices, reducing employment or hours, investing in productivity-enhancing capital, or absorbing costs into profit margins, she noted.
She also highlighted the UK’s vulnerability to external shocks as an open economy. “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.”
Greene pointed to the outsized influence of the US Treasury curve, describing it as a “drunken dragon” that heavily impacts the UK market, especially amid global geopolitical risks and shifts in US economic policy under the president-elect.
