BoE’s Greene flags inflation risks as wage disinflation stalls

Wages could begin adding upward pressure to prices, Bank of England (BoE) Monetary Policy Committee (MPC) member Megan Greene indicated on Tuesday, saying that “wage disinflation has stalled,”

Describing the risks as “greater than we thought.” Greene reiterated her view that “We [the BoE] should proactively lean against the risk of second-round inflation effects,”

With UK inflation figures due the following day, Greene stressed that the slowdown in wage growth appears to have halted at levels above the BoE’s goal.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

What are the key takeaways?

The slowdown in wage growth has come to a halt

Still believe proactive action is needed to counter the risk of second-round inflation effects

Second-round effects pose a greater risk than previously thought.

Pay growth nearer 3.5% is indicated by forward-looking data

The slowdown in wage growth appears to have halted above levels consistent with 2% inflation

The economy’s resilience has been surprising

Slack in the labour market may already have peaked

BoE: Frequently asked questions

What is the Bank of England’s role, and why does it matter for the Pound?

Responsibility for the United Kingdom’s monetary policy rests with the Bank of England (BoE). The central bank’s main objective is ‘price stability’, meaning a steady inflation rate of 2%, which it pursues by adjusting base lending rates. By setting the rate at which commercial banks borrow from it and lend to one another, the BoE determines the broader level of interest rates across the economy. These decisions also influence the value of the Pound Sterling (GBP).

Why do the Bank of England’s monetary policy decisions affect Sterling?

An inflation reading above the Bank of England’s target prompts it to increase interest rates, raising borrowing costs for households and businesses. Sterling benefits because higher rates increase the UK’s appeal as a destination for global investors’ funds. By contrast, below-target inflation signals slowing economic growth. In that situation, the BoE will consider rate cuts to make credit cheaper, hoping businesses will borrow to fund projects that generate growth. Such a move is negative for the Pound Sterling.

How does Quantitative Easing (QE) work, and what does it mean for the Pound?

When financial conditions become extreme, the Bank of England may turn to Quantitative Easing (QE), a policy designed to substantially boost credit flows through a stalled financial system. It is a last-resort measure used when interest rate cuts will not deliver the required result. Under QE, the BoE prints money to purchase assets from banks and other financial institutions, usually government bonds or AAA-rated corporate bonds. The Pound Sterling typically weakens as a result.

How does Quantitative tightening (QT) work, and why does it matter for the Pound Sterling?

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses the QE process. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. Under QT, however, it halts further bond purchases and no longer reinvests the principal received as bonds in its existing holdings mature. This generally supports the Pound Sterling.