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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Now, darkening global economic backdrop has opened the door to

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Speaker 2: quicker rate cuts from the Bank of England. That's as

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Speaker 2: officials i the impact of Trump's tariffs so cooling labor

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Speaker 2: market and tumbling energy prices. Now markets are fully pricing

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Speaker 2: three quarter points production this year and a fifty percent

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Speaker 2: chance of a fourth with a c next month. All

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Speaker 2: but certainly we'll joining us now for an exclusive interview

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Speaker 2: is Megan Green, member of the Monetary Policy Committee at

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Speaker 2: the Bank of England, and welcome also to our radio listeners. Megan,

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Speaker 2: as always, thank you so much for giving us a

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Speaker 2: little bit of your very busy schedules. Now, market are

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Speaker 2: now gaining conviction that the BOE will you know, probably

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Speaker 2: deliver another rate cut next month and more than three

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Speaker 2: rate cuts by.

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Speaker 3: The end of the year. How comfortable are you with

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Speaker 3: that pricing look?

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Speaker 1: Market pricing has moved around a whole lot over the

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Speaker 1: past couple of weeks, and it's also worth pointing out

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Speaker 1: that not all of that is focused on what's going

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Speaker 1: on in the UK. So traditionally about a third of

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Speaker 1: the moves in the gilt curve have been driven by

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Speaker 1: things happening outside the UK these days, it's about half

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Speaker 1: that's been driven by things happening outside the UK. So

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Speaker 1: part of those moves I think reflect what's going on globally,

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Speaker 1: and you know, we're just about to go into an

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Speaker 1: interest right round, so we'll have to see.

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Speaker 4: But I would highlight that those.

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Speaker 1: Market moves don't all reflect to U fundamentals in the UK.

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Speaker 3: Because what of uncertainties.

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Speaker 2: If you look at you know, there seems to be

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Speaker 2: a lot of disinflationary kind of impact from falling energy prices,

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Speaker 2: we could dollar tightening financial conditions, global demand.

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Speaker 3: Does that point to a cont you know, in May, so.

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Speaker 1: That there are factors that are both inflationary and disinflationary.

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Speaker 1: You know, I'm particularly concerned. We've had weakness and output

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Speaker 1: for about nine months now and we're trying to figure

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Speaker 1: out what the big driver of that is, whether it's

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Speaker 1: demand or supply driven.

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Speaker 4: I think there are reasons to think it's both, actually, but.

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Speaker 1: I'm more concerned about the supply side, and that actually,

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Speaker 1: I'm on balance, would be inflationary.

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Speaker 4: So that's part of it.

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Speaker 1: When it comes to Tears and the developments over the

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Speaker 1: past couple of weeks, there again, are both the inflationary

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Speaker 1: and disinflationary impulses.

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Speaker 4: So when it comes to.

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Speaker 1: Tariffs, in particular for the UK, we're a small, open economy, right.

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Speaker 4: The US is our biggest.

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Speaker 1: Single country trade partner, but the EU of course is

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Speaker 1: our biggest trade partner overall. So if you have export substitution,

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Speaker 1: then that would tend to push down on growth and inflation.

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Speaker 1: If you have trade diversion from other countries that are

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Speaker 1: trying to find a new home for their markets, that

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Speaker 1: also pushes down on inflation. But we saw during the

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Speaker 1: pandemic that if you have a repatterning of supply chains,

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Speaker 1: that can push up on inflation. And also if we

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Speaker 1: have trade fragmentation writ large, then that tends to reduce

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Speaker 1: knowledge spillovers, that reduces potential growth.

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Speaker 4: That tends to be inflationary.

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Speaker 1: So something you've mentioned was exchange rates, and those have

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Speaker 1: not gone as the economic.

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Speaker 4: Theory would suggest.

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Speaker 1: Normally, if the US announces or imposes unilateral tear if

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Speaker 1: some other countries, the theory suggests the dollars should appreciate

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Speaker 1: the opposite has actually happened, and so that in and

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Speaker 1: of itself could be disinflationary for the UK, But of course,

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Speaker 1: as I mentioned, the EU is the UK's biggest trade

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Speaker 1: partner in the Euro has appreciated, so net net, if

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Speaker 1: you look at the kind of Sterling exchange rate index,

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Speaker 1: the pounds up a little bit. There's a ton of

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Speaker 1: uncertainty around this, but they are both inflationary and disinflationary forces.

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Speaker 2: But are you concerned about the slight recent strength and pound?

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Speaker 2: Does that change actually, you know, tightening financial conditions.

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Speaker 4: So it does.

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Speaker 1: I mean the currencies have been moving a lot recently

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Speaker 1: as well. We've also seen off the back of previous

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Speaker 1: kind of structural shift after the global financial crisis. After COVID,

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Speaker 1: the dollar didn't always behave immediately as the theory would suggest.

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Speaker 1: It weakened and then subsequently rebounded. So I think it's

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Speaker 1: a bit too early to say kind of where the

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Speaker 1: dust is going to settle on currencies. But I will

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Speaker 1: say if the dollar continues to depreciate on balance, that

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Speaker 1: would be disinflationary for the UK, and if the opposite

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Speaker 1: happens less.

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Speaker 3: So, so you are you worried?

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Speaker 2: And you said in the past actually that there's a

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Speaker 2: danger that it could you know, muddy the water on inflation.

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Speaker 3: The moves and pounds.

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Speaker 2: So are you worried that there could be a reverse

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Speaker 2: and then it becomes an uppoard pressure on inflation quite quickly?

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Speaker 4: It could be that's right.

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Speaker 1: You know, currency forecasters have the hardest job, second only

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Speaker 1: to energy forecasters. And like I said, it's been really

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Speaker 1: volatile and we're not quite sure where the dust will settle.

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Speaker 1: If the pound were to strengthen more, actually, then we'll

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Speaker 1: be importing disinflationary forces. If the pound were to depreciate,

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Speaker 1: then the opposite would happen. So it just underscores the

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Speaker 1: amount of uncertainty that we're looking at. Given that we

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Speaker 1: are basing our policy now on where we expect the

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Speaker 1: economy to be in you know, a year and a half,

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Speaker 1: two years time, it's pretty difficult.

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Speaker 2: And how do you see domestic policy actually impacting behavior

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Speaker 2: for example, you know, the next policy in terms of companies,

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Speaker 2: but also consumers.

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Speaker 1: Yeah, so the combination of the knicks and the increase

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Speaker 1: in the national live wage is something we've been looking

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Speaker 1: at a lot. We've asked companies through our agency network

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Speaker 1: how they plan on adjusting in response to that, and

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Speaker 1: we've also looked at other surveys that have been done.

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Speaker 1: There are a number of different margins of adjustment. So

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Speaker 1: you could, you know, decrease employment, you could decrease hours,

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Speaker 1: you could offer lower wage increases. You know, you could

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Speaker 1: have it eat into profits, you could boost productivity. When

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Speaker 1: we ask firms how they plan on responding and lay

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Speaker 1: those out, they basically say, yes, we're going to do those.

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Speaker 4: And so it's a bit too early.

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Speaker 1: It just kicked in in April, right, It's a bit

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Speaker 1: too early to say exactly what the margins of adjustment are.

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Speaker 1: So far, it seems like eating into profits will be

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Speaker 1: the most immediate one, but further down the line it

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Speaker 1: could end up feeding through into kind of labor quantities

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Speaker 1: and that's a concern of ours certainly. So we have

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Speaker 1: incorporated the NIXT the National Living Wage into our inflation forecast.

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Speaker 1: It pushes up on inflation a little bit ya about

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Speaker 1: point two percentage points, so that's not massive, but it

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Speaker 1: is something. But you know, the big risk I think

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Speaker 1: is that there could be a shakeout in the labor market.

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Speaker 1: We could see unemployment take up. There are no signs

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Speaker 1: of that yet. Actually, even though the KNICKS and the

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Speaker 1: National Living Wage have come to be so it might

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Speaker 1: be a bit too soon. We see in the kind

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Speaker 1: of forward looking PMI employment indices they were really falling before,

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Speaker 1: they weren't performing well, but actually in the most recent

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Speaker 1: one they've ticked up, which suggests a lot of that

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Speaker 1: was around kind of sentiment around the knicks rather than

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Speaker 1: actual expected behavior.

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Speaker 2: Has the labor fourth dynamic changed actually for the war

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Speaker 2: since twenty twenty.

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Speaker 1: Since twenty twenty COVID, Yeah, I mean, what we've seen

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Speaker 1: is that the labor market has held up surprising well

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Speaker 1: in the UK as it has across developed economies. Right,

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Speaker 1: so we have unemployment of around four point four percent.

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Speaker 4: That's pretty low.

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Speaker 1: I should provide a big health warning with our labor

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Speaker 1: market data because the Labor Force Survey hasn't been getting

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Speaker 1: as many responses as it did pre COVID. And that's

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Speaker 1: been the case everywhere, but especially so in the UK,

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Speaker 1: so it's hard to get a real read on the

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Speaker 1: labor market. That said, we look at a bunch of

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Speaker 1: other indicators and series. We have our own kind of

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Speaker 1: indicator based models, and underlying employment is growing pretty slowly. Unemployment,

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Speaker 1: you know, is ticking up very slowly. We've seen the

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Speaker 1: labor market weakening since COVID slowly again, not as quickly

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Speaker 1: as one might have expected, and wage growth remains pretty high.

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Speaker 1: Now that's wage growth according to the Labor Force Survey

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Speaker 1: again and it's pretty volatile and actually ticked up at

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Speaker 1: the end of last year since started to come back down.

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Speaker 1: But if we look at other metrics of wage growth,

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Speaker 1: they're also pretty high. And that's important because that's a

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Speaker 1: huge input into services inflation, which tends to be more

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Speaker 1: domestically driven, and so that's something that we're looking at

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Speaker 1: a lot. Services inflation in the UK is around five percent.

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Speaker 1: It's much higher than also other developed economies, and that's

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Speaker 1: a sign that maybe there is some inflation persistence UK economy.

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Speaker 2: I was going to ask you what part of the

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Speaker 2: UK inflation spectrum are you most worried about.

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Speaker 3: Is it services or private sector wages?

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Speaker 1: So I would say I'm more worried about services inflation.

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Speaker 1: It actually is surprised on the downside more recently, and

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Speaker 1: I should highlight that the disinflationary process is underway and

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Speaker 1: continues to be underway as we see it in the data.

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Speaker 1: I'm worried about services inflation, as I mentioned, because it

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Speaker 1: is an indicator of domestically driven inflation, which we can

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Speaker 1: actually do something about. It's the biggest contributor to inflation

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Speaker 1: in the UK. The biggest part of it is actually

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Speaker 1: pay growth, which is why I'm also focused on wages.

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Speaker 1: But one factor that feeds into wage growth, of course

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Speaker 1: is inflation expectations. And we see in household inflation expectations rise,

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Speaker 1: and that goes for both short term measures and medium

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Speaker 1: term measures. The latter's a bit more worsome. Actually, you

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Speaker 1: don't usually see those rise, so I think they remain

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Speaker 1: well anchored. We've looked at kind of the relationship between

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Speaker 1: inflation expectations and the economy pre COVID and come up

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Speaker 1: with kind of bands of reasonable inflation expectations now and

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Speaker 1: where we are is within those bands, but towards the

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Speaker 1: top of it. So it is something I'm looking at

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Speaker 1: as another sign of inflation persistence.

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Speaker 2: Everything seems to be, you know, it's changing so quickly,

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Speaker 2: and the markets are changing so quickly. Is there anything

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Speaker 2: that you're you know that you can constantly say will

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Speaker 2: not change.

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Speaker 1: That won't change, that we're will have a lot of

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Speaker 1: uncertainty for a while, is one thing.

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Speaker 4: I mean, there is a lot of volatility.

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Speaker 1: The markets haven't actually really responded as you would expect

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Speaker 1: in the face of a risk off environment and that

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Speaker 1: amount of volatility, and so that does inject quite a

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Speaker 1: lot of uncertainty. And there's you know, policy uncertainty coming

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Speaker 1: out of the US as well.

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Speaker 2: I mean, I was looking at the thirty year borrowing

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Speaker 2: costs for the UK around five point three five percent.

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Speaker 2: I mean, it's the highest they've been the century. Is

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Speaker 2: that a message to policy makers from bond vigilantes or

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Speaker 2: how do you see this?

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Speaker 1: So could, but it could also just be a reflection

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Speaker 1: on what's happening in the US in particular, and a readover.

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Speaker 1: That's what we've seen since COVID, is that there's just

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Speaker 1: significant readover automatically. Even though the structure of the US

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Speaker 1: and the UK economies are quite different. Because the UK

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Speaker 1: is a small, open economy, it does get dragged around

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Speaker 1: by developments happening elsewhere.

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Speaker 3: Yeah, how much?

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Speaker 2: I mean, you know, we're trying to theoryize about what

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Speaker 2: the FED does and when they can start cutting if

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Speaker 2: labor goes down and like the third quarters, that when

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Speaker 2: they start cutting aggressively. But what's your pass for interest

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Speaker 2: rate cuts in the next few you know, six to

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Speaker 2: eight months for the Bank of England.

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Speaker 4: For the Bank of England. So I have been on

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Speaker 4: the more cautious side of our rate.

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Speaker 1: Cutting cycle because of all these indicators that there could

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Speaker 1: be inflation persistence. There's also uncertainty. I do think there

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Speaker 1: are risks on both sides. So actually so I'm also

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Speaker 1: careful and in our lingo, I think that the tariffs

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Speaker 1: actually represent more of a disinflationary risk than an inflationary

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Speaker 1: risk though, and and so.

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Speaker 4: We'll have to see how that develops going forward.

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Speaker 2: I I is there anything that actually mean? First of all,

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Speaker 2: is it's so difficult to know where the current neutral

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Speaker 2: rate is?

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Speaker 3: Yes? Do you have an idea of where it is?

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Speaker 2: Because that'd be good to guide the markets towards that.

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Speaker 4: Yeah.

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Speaker 1: As you know, we use a lot of different methodologies

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Speaker 1: to try to estimate the real neutral rate. We use

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Speaker 1: financial markets indicators, we use surveys, we ask investors, we

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Speaker 1: use macro models, and they all have massive bands of uncertainty.

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Speaker 4: So I won't give you a point forecast.

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Speaker 1: In February we put out kind of our analysis on

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Speaker 1: this and show that depending on which methodology you use,

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Speaker 1: the longer neutral rates probably gone up by between twenty

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Speaker 1: five basis points and one hundred and fifty basis points,

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Speaker 1: so that's a pretty wide band. But what we can

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Speaker 1: conclude is it's probably gone up, and this is something

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Speaker 1: I've believed for a while, so I think it's higher

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Speaker 1: than where it was. When we ask investors, they say

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Speaker 1: somewhere between three point two five and three and a

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Speaker 1: half percent.

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Speaker 4: I don't think that's totally unreasonable.

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Speaker 2: Megan, is there any case that the UK has a

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Speaker 2: competitive advantage with the terrorists? We could get given there

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Speaker 2: at like, you know, a baseline ten percent, which offers

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Speaker 2: I guess more certainty for businesses than in the EU

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Speaker 2: where they're still negotiating.

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Speaker 4: Yeah, so again we'll have to know when the dust settles.

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Speaker 1: But the EU was given a lower teriff rate than

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Speaker 1: many other countries, and so that does end up being

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Speaker 1: a bit of a competitive advantage, particularly with respect to

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Speaker 1: the EU.

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Speaker 4: So we'll see what happens with the EU tariffs.

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Speaker 1: But if the EUK does end up with lower tariffs

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Speaker 1: then the EU, then you might have some kind of substitution.

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Speaker 1: So actually, normally trade diversion, you think of it as

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Speaker 1: disinflationary for the UK because you think of for example,

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Speaker 1: products coming from Asia looking for a market, you know,

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Speaker 1: them offering lower prices to find access to the market.

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Speaker 1: But actually you could get trade diversion from the EU

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Speaker 1: because the UK has lower terraffs. It all depends on

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Speaker 1: how much substitution there really.

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Speaker 2: Is when you look at the complex over the next

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Speaker 2: couple of months. Is there a point where if tariffs

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Speaker 2: come down, let's say China or India, does that give

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Speaker 2: you hope for a more settled economic backdrop worldwide? Or

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Speaker 2: is it's still gonna be messy.

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Speaker 1: So I think there's gonna be a lot of volatility

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Speaker 1: in terms of policy making. Regardless, I don't expect us

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Speaker 1: to know exactly what the global trade landscape or financial

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Speaker 1: landscape will look like anytime too soon.

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Speaker 3: I know there's a y.

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Speaker 2: You know, we led the show actually talking about central

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Speaker 2: bank independence because of what Donald Trump was saying about

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Speaker 2: Jay Powell. I mean, what you know as a central

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Speaker 2: banker sitting on the NPC, like, what's you know, how

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Speaker 2: does a bo we react to this?

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Speaker 1: So you know, credibility is the currency of central banks,

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Speaker 1: and I think independence is quite an important piece of

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Speaker 1: that that when we say we will hit our target,

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Speaker 1: and the target for the Bank of England is.

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Speaker 4: Provided by Treasury. But we will hit our target.

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Speaker 1: I think we can do so credibly because we're free

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Speaker 1: to make the decisions that we believe will most effectively

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Speaker 1: achieve that, and so I think central bank independence is

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Speaker 1: is absolutely crucial.

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Speaker 3: Megan, thank you so much for joining us today. That was,

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Speaker 3: of course, Megan

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Speaker 2: Greed, member of the Bank of England's Monetary Policy Committee,

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Speaker 2: joining us for an exclulme s IF conversation