Megan Greene, the external member of the Monetary Policy Committee, has warned that the recent energy price shock could reignite inflationary pressures and that the Bank of England must be vigilant against the risk that inflation proves more persistent than the central forecast suggests.
In a speech titled "Here We Go Again," Greene drew parallels between the current situation and the energy price shock that followed Russia's invasion of Ukraine in 2022, which triggered the most severe inflationary episode in the UK in four decades. She argued that while the current shock was smaller, the experience of the past three years demonstrated that energy price increases could have larger and more persistent effects on inflation than economic models predicted.
Greene's speech was significant because she is widely regarded as one of the more hawkish members of the MPC. Her warning that the Bank should be cautious about cutting interest rates while energy prices remained volatile was interpreted by financial markets as reducing the probability of an early rate cut.
The speech also addressed the broader question of how central banks should respond to supply-side shocks. Greene argued that the traditional framework, which treats supply shocks as transitory and advises central banks to "look through" them, was inadequate when shocks were large, persistent and recurrent. She called for a new framework that was better equipped to deal with an era of greater supply-side volatility.
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