BoE’s Greene warns stalled wage disinflation raises inflation risks

On Tuesday, Megan Greene, a member of the Bank of England's Monetary Policy Committee (MPC), warned that wage disinflation has stalled, hinting that salaries could start pushing prices higher. Greene also expressed her belief that the risks of second-round inflation effects are greater than previously thought, stating that the Bank of England (BoE) should proactively counteract such risks. Her comments come a day before the release of UK's inflation figures.

Wage disinflation has stalled at levels above the BoE's 2% inflation target, according to Greene. Forward-looking data suggests that pay growth is closer to 3.5%. Despite showing surprising resilience in the economy, labor market slack might have peaked. The BoE decides the UK's monetary policy with the aim of achieving 'price stability', or a steady inflation rate of 2%.

It achieves this by adjusting base lending rates, which in turn impacts the overall level of interest rates in the economy and the value of the Pound Sterling (GBP).

When inflation is above the target, the BoE responds by raising interest rates, making it more expensive for individuals and businesses to access credit. This is positive for the Pound Sterling as higher interest rates make the UK more attractive for global investors. When inflation falls below target, it signals economic growth is slowing, and the BoE may consider lowering interest rates to encourage borrowing for growth-generating projects, which is negative for the Pound Sterling.

In severe cases, the Bank of England can implement Quantitative Easing (QE), a last resort policy where it prints money to buy government or AAA-rated corporate bonds from banks and financial institutions, usually resulting in a weaker Pound Sterling. The reverse of QE, Quantitative Tightening (QT), is implemented when the economy is strengthening and inflation starts rising, generally being positive for the Pound Sterling.