"The risk of failing to act is more severe than the risk of acting": BoE's Greene signals readiness to raise rates
Megan Greene, a member of the Bank of England's (BoE) Monetary Policy Committee (MPC), warned on Tuesday that United Kingdom (UK) households and businesses appear more sensitive to rising inflation than in the past, emphasizing that the risks of failing to act against persistent inflation outweigh the risks of tightening policy unnecessarily.
Key takeaways:
UK households and businesses are arguably more sensitive to increases in inflation than in previous periods.
In a scenario where energy prices generate stronger second-round inflation effects, Greene said interest rates may need to be raised.
Greene argued there is a benefit to acting sooner on rates, noting that the speed of the policy response can be just as important as its magnitude.
She said she places a relatively high weight on stabilizing prices compared with supporting economic output.
Greene added that the risk of acting against inflation, even if it proves less persistent, is less severe than the risk of failing to act.”
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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