The Bank of England headquarters, in London, on Sept. 25, 2023.HOLLIE ADAMS/Reuters
Bank of England policy-maker Megan Greene said interest rate cuts in Britain should remain “a way off” because of the persistence of inflation pressure, which is still more of a threat than in the United States.
Greene said that markets were wrong to expect that the British central bank would cut rates earlier and by more than the Federal Reserve this year, arguing that a later start to policy easing would be better.
“In my view, rate cuts in the U.K. should still be a way off as well,” Greene wrote in a column published in the Financial Times.
Greene’s remarks contrasted with those made recently by BoE Governor Andrew Bailey, who has talked openly about the prospect of rate cuts this year, describing expectations for this as “not unreasonable.”
Jonathan Haskel, one of the Monetary Policy Committee’s (MPC) most hawkish members, has said that rate cuts should be “a long way off.”
The next policy decision by the MPC is due on May 9.
“Following surprisingly strong U.S. March CPI inflation, markets now expect the Bank of England will cut rates earlier and by more than the Federal Reserve this year,” Greene said.
“The markets are moving rate cut bets in the wrong direction,” Greene, a U.S. economist who joined the MPC last July, added.
In the article titled “Markets must stop comparing the U.K. and the U.S.,” Greene said the persistence of inflation is a greater threat for Britain than the U.S.
Money markets expect around 45 basis points of interest rate cuts by the BoE this year and the first rate cut is fully priced in for August, according to LSEG data.
That is more than the 42 bps of U.S. rate cuts priced in by investors, who pared bets on the Fed loosening policy after hotter-than-expected U.S. inflation data on Wednesday.
Greene said that the difference in labour supply between the two countries is also stark and British services inflation remains much higher than in the United States.
“Overall labour market participation in the U.K. has not recovered to the pre-pandemic trend. Participation in the U.S., on the other hand, has exceeded the pre-COVID trend.”
British annual consumer price inflation slowed in February to 3.4 per cent and it is expected to fall below the BoE’s 2 per cent target in the April-June period before rising slightly again.