BoE’s Greene: Inflation risks skewed to the upside
Bank of England (BoE) Monetary Policy Committee (MPC) member Megan Greene said during the European trading session on Monday that the central bank needs to wait to see how Middle East conflicts will flare before making any monetary policy adjustments.
Comments
It's worth waiting to see how the US-Iran war develops before deciding whether to hike interest rates.
Inflation risks are skewed entirely to the upside.
Sluggish economy and loose labour market should limit second-round effects from energy shock.
Market reaction
No immediate response appears on the British Pound (GBP) due to BoE's Greene. The reason might be that they lack any meaningful guidance on the monetary policy outlook. As of writing, GBP/USD is down 0.17% to near 1.3610 but has recovered a majority of its early losses.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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