The Bank of England's Megan Greene on Monetary Policy in a World of Supply Shocks

Episode Summary

Executive Summary: Tracy Alloway and Joe Weisenthal interview Megan Greene, an external member of the Bank of England’s MPC, about how UK monetary policy has changed amid repeated supply shocks, persistent above-target inflation, weak demand, and rising gilt yields. Greene argues central banks must increasingly use scenario analysis and risk management, since inflation is being shaped by energy shocks, wage/price persistence, and spillovers from the US and geopolitics.

Main Topics: Bank of England MPC role and structure (Priority: 5/5): Greene explains the MPC’s nine-member setup, the use of four external members to avoid groupthink, and the Bank’s unusually transparent voting records and dissents. UK inflation persistence and supply shocks (Priority: 5/5): The conversation centers on why inflation remains sticky after COVID and Ukraine, and how the Iran-related energy shock raised upside inflation risks while weakening growth. Monetary policy transmission in the UK (Priority: 4/5): Greene discusses how shorter mortgage fixes and refinancing cycles make BOE policy transmit more quickly than in the US, but also leave households feeling squeezed even during cuts. Demand weakness versus weak supply (Priority: 4/5): The UK economy is described as weak on both demand and supply, with potential growth impaired by low investment, productivity problems, and repeated negative supply shocks. US spillovers, gilt yields, and financial conditions (Priority: 4/5): The interview explores how US inflation, Treasury yields, and Fed policy influence UK financial conditions and gilt markets even though the BOE does not control them. AI, productivity, and the future supply side (Priority: 3/5): Greene says AI could be a positive supply shock, but there is not yet enough evidence to build a major productivity assumption into forecasts. Central banking in a new era (Priority: 5/5): The discussion closes on whether central banks must move from precise forecasting toward broader scenario planning as shocks, geopolitics, climate, and statecraft reshape the macro environment.

Key Arguments: The BOE’s primary mandate is 2% inflation over the medium term; everything else is secondary to that goal. External MPC members are meant to bring different perspectives and reduce groupthink, which is why dissent is normal at the BOE. UK inflation had been above target for most of the past five years, and forward indicators for wages and prices were stalling even before the Iran-related energy shock. Central banks can usually look through direct energy effects, but second-round effects matter because they can embed inflation into wages and pricing behavior. Repeated supply shocks make households and firms more inflation-sensitive, so later shocks can trigger stronger and faster pass-through into expectations. The UK mortgage market transmits rate changes more quickly than the US, but many borrowers are still feeling higher debt service costs as fixed deals reset. Weak consumption may reflect both rate pass-through and inflation scarring, which could push growth lower even as inflation risks remain elevated. US inflation, payrolls, and Treasury moves influence UK financial conditions significantly, despite the lack of a direct policy connection. AI may eventually improve productivity and ease inflation pressure, but the Bank is not yet assuming a material near-term effect. Because central banks lack tools to fix supply problems directly, policy should increasingly rely on scenarios, judgment, and risk management rather than narrow point forecasts.

Data Points: MPC size: 9 members - The Bank of England Monetary Policy Committee includes five internal members and four external members. External MPC members: 4 - Greene describes the four external members as intentionally brought in from outside the Bank to reduce groupthink. Meeting frequency: Every 6 weeks - Greene notes the MPC meets and votes on interest rates every six weeks. BOE inflation target: 2% - The Bank of England’s mandate is price stability at 2% inflation sustainably over the medium term. UK inflation history: Above target for the best part of 5 years - Greene says inflation has been above 2% for all but one or two months in the past five years. Underlying UK GDP growth: 0.2% per quarter - Greene characterizes underlying GDP growth as very weak based on survey-based estimates. Monetary policy lag: 18 to 24 months - She explains that rate changes affect the economy with a long lag, so immediate responses to energy shocks may be mistimed. Threshold for households noticing inflation: 3% to 3.5% - Greene says the Bank’s research suggests households pay much more attention once inflation is in this range. UK yield spillover before pandemic: About one-third - Before COVID, roughly a third of gilt yield curve moves were driven by outside the UK. UK yield spillover since pandemic: About one-half - Since the pandemic, about half of gilt curve moves have come from outside the UK. UK mortgage structure: Mostly 2- and 5-year fixed mortgages - She contrasts the UK’s mortgage structure with the US 30-year fixed model. U.K. labor market: Slack / weakening - Greene says the labor market is weaker now than during the 2022 inflation shock. Historical supply-shock years cited: 2008, 2011, 2014, 2022 - She points to these UK episodes as examples where second-round effects occurred. UK unemployment in 2011: 8% - Greene notes the labor market was much weaker in 2011 than it is today.

Pivotal Quotes: "The idea is to have different perspectives. I come from the private sector. Many members of the MPC come from academia." — Megan Greene: Explaining why the Bank of England uses external MPC members and how they are meant to reduce groupthink. "The risk is entirely on the upside." — Megan Greene: Her view on inflation and energy prices after the Iran-related shock and the possibility of second-round effects. "We're no longer at a point where we can kind of say, well, one day we might have some of these things happen. I think we're already there." — Megan Greene: Her argument that repeated geopolitical, climate, and economic-statecraft shocks have become a persistent feature of the macro environment.

Implications: For listeners and markets, the message is that UK monetary policy now has to manage persistent supply shocks, weak growth, and volatile global spillovers with limited tools. Expect more scenario-based central banking, less reliance on clean forecasts, and continued pressure on households and gilt markets.