The Bank of England’s Greene has indicated that persistent inflation is unlikely to decrease without intervention. He supports a cautious approach to removing monetary stimulus, suggesting monetary policy may need to remain strict.
This year is expected to show above-target inflation for the fifth consecutive time. Greene emphasised the importance of clear communications regarding monetary policy changes and noted the risks of second-round effects from inflation.
Ongoing Trends Towards Deflation
He discussed ongoing trends towards deflation and mentioned that every Monetary Policy Committee meeting will be crucial. Wage direction remains unclear, and there may be a larger output gap than previously estimated.
Greene’s comments reinforce the position that stricter monetary conditions may be necessary for longer than some had expected. With inflation persistently above target, the risk of loosening policy too soon becomes apparent. Price pressures have proven stubborn, and any premature adjustment in rates could allow inflation to embed itself further into wages and broader pricing mechanisms.
The reference to second-round effects highlights a particular concern: inflation does not simply exist in isolation but instead feeds into expectations, wage-setting, and business costs. If firms continue to raise prices in response to higher labour costs, the cycle becomes harder to break. There is, therefore, a clear argument for maintaining restrictive measures until sufficient evidence emerges that inflation trends are firmly under control.
Deflationary trends, however, introduce an additional layer of complexity. While headline inflation remains elevated, certain sectors are showing signs of cooling. The challenge lies in distinguishing between short-term fluctuations and a broader shift in dynamics. If deflationary pressures grow, policymakers could find themselves facing competing risks—tightening too much could suppress growth, yet easing prematurely would undermine the progress made in fighting inflation.
Impact Of Wage Growth And Output Gap
Much of this will come down to data emerging over the next few months. Wage growth remains an open question. While some indicators point to moderation, others still suggest a system catching up to past price increases. If wage pressures persist, it will be harder to justify shifting towards a looser stance.
The mention of a potentially larger output gap also carries weight. If estimations have indeed been too conservative, that would imply there is unused capacity in the system, which could act as a dampener on inflation. That said, revisions to such estimates tend to take time, and betting too heavily on them before clearer signals appear would be risky.
Each policy meeting in the near future is set to be highly consequential. Adjustments in rates or guidance could shift expectations quickly, and any misstep in communication risks unsettling markets. That makes clarity in messaging particularly important. Traders will need to parse not only decisions but also the language used to justify them, as even the slightest indication of changing priorities could have immediate effects.
For now, caution appears to be the prevailing sentiment, and warnings about inflation persistence should not be overlooked. The balance between maintaining discipline and avoiding unnecessary economic slowdown will require careful judgement, and responses will need to be grounded in clear signals rather than guesswork.
