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

What It Covers

Bank of England MPC external member Megan Greene explains why she voted to hold rates despite weak UK growth, detailing how successive supply shocks — from COVID to Ukraine to Iran — have embedded inflation persistence through changed household expectations and firm pricing behavior, complicating standard monetary policy responses.

Key Questions Answered

• •Inflation Threshold Shift: UK households now notice inflation at 3–3.5%, down from the previous 4% threshold. This lower sensitivity band means any new energy shock triggers faster expectation changes. Policymakers must account for this recalibrated public attentiveness when assessing whether second-round wage and price-setting effects will materialize from each new supply disruption.
• •Second-Round Effects Timing Problem: Central banks cannot wait for concrete evidence of second-round wage-price spirals before acting — monetary policy transmits with an 18–24 month lag. Greene's framework distinguishes three propagation phases: direct energy price effects (look through), indirect effects like food costs (partially lean against), and second-round behavioral shifts (act proactively before confirmation).
• •UK Mortgage Transmission Mechanism: UK households predominantly hold 2- and 5-year fixed mortgages. Even as the BOE cuts rates, consumers rolling off older fixed deals face sharply higher debt servicing costs, suppressing spending. This creates a paradox where rate cuts fail to stimulate consumption, requiring policymakers to separate the rate cycle from actual household financial conditions.
• •State-Dependent Firm Pricing: Since the pandemic, UK firms shifted from schedule-based price-setting to state-dependent pricing — resetting prices more frequently when inflation rises. This structural change accelerates cost pass-through to consumers. Greene's BOE Decision Makers Panel survey showed firm price expectations one year ahead had stalled above target even before the Iran energy shock materialized.
• •Economic Statecraft as Permanent Supply Shock Source: Tariffs, export controls, and investment restrictions used as foreign policy tools represent recurring negative supply shocks, not one-off events. Combined with climate transition risks, this makes the traditional central banking approach of "looking through" temporary supply disruptions untenable. Greene advocates scenario analysis and risk management frameworks over precise point forecasts.