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

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

by Bloomberg

52m•May 11, 2026
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Overview of The Bank of England's Megan Greene on Monetary Policy in a World of Supply Shocks

Bloomberg’s Odd Lots speaks with Megan Greene, an external member of the Bank of England’s Monetary Policy Committee (MPC), about how policymakers should navigate a world defined by repeated supply shocks. The conversation focuses on the UK’s weak growth, sticky inflation, rising energy risks, and why central banks may need to lean more heavily on scenario analysis and risk management rather than precise forecasting.

Key Themes and Takeaways

The UK economy is weak on both demand and supply

  • Greene says the UK economy has been underperforming for years, with growth around 0.2% per quarter.
  • Weakness is not just about poor demand; the supply side is also constrained, which raises the risk that any demand rebound could become inflationary.
  • She argues the UK is still dealing with the aftermath of COVID, the Ukraine war, and now new energy shocks.

Inflation is still the main problem

  • The Bank of England’s mandate is 2% inflation sustainably over the medium term, with other goals secondary to that.
  • Greene says inflation has been above target for most of the past five years.
  • Before the latest energy shock, there were already signs that disinflation was stalling:
    • firms’ price expectations stopped falling,
    • wage growth expectations remained elevated,
    • and household inflation expectations were still too high.

Why the BOE held rates

  • Greene voted to hold interest rates because the BOE has to weigh:
    • possible second-round inflation effects from energy shocks,
    • against the risk of over-tightening into an already weak economy.
  • She says the BOE should not react immediately to the direct effects of energy price spikes because monetary policy works with a 18–24 month lag.
  • The real concern is whether energy shocks feed into:
    • wage demands,
    • price-setting behavior,
    • and ultimately a self-reinforcing inflation spiral.

Second-round effects are the critical risk

  • Greene emphasizes that households and firms are now more sensitive to inflation, especially when it rises above roughly 3%–3.5% in the UK.
  • Firms have become more state-dependent in pricing, meaning they raise prices more quickly when inflation is high.
  • She warns that repeated shocks can make inflation more persistent over time, even if each shock looks “temporary” on its own.

The UK is unusually exposed to energy volatility

  • Greene explains that the UK is vulnerable because:
    • it is heavily exposed to gas prices,
    • UK electricity prices are linked to gas,
    • and it lacks the same degree of energy independence seen in the US.
  • She notes that households were temporarily shielded by the Ofgem price cap, but higher costs will continue to filter through.

AI may help on supply, but its effect is still uncertain

  • The Bank of England has found only nascent evidence that AI-exposed sectors may be seeing fewer job openings.
  • Greene does not see strong evidence yet that AI is materially reshaping the labor market.
  • But she sees AI as a possible positive supply shock that could eventually improve productivity.
  • The timing, however, is highly uncertain, and the BOE has not built a major AI assumption into its near-term productivity outlook.

Monetary Policy, Mortgages, and Spillovers

UK mortgage structure changes transmission

  • Compared with the US, UK mortgage rates reset more frequently, mostly on 2-year or 5-year fixes.
  • That means interest rate changes tend to transmit more quickly into the real economy.
  • But Greene notes that even as rates have started to fall, many households still face higher debt-servicing costs as older mortgages roll over.

US policy still matters a lot for the UK

  • Greene says UK financial conditions are significantly influenced by the US Treasury market.
  • In practice, US inflation data and even US payrolls can affect UK markets.
  • Spillovers from the US and Eurozone are a major part of the BOE’s thinking, especially because the UK cannot control those external conditions.

Fiscal Policy and Gilt Markets

Fiscal policy matters, but the BOE focuses on its mandate

  • Greene says the BOE takes fiscal policy as given based on what is legislated.
  • She does not think debt-service costs are yet creating a major fiscal dominance problem.
  • Rising gilt yields matter primarily because they tighten financial conditions, not because coupon payments themselves are creating inflation.

Bond markets are important, but not always right

  • Greene says markets are sometimes efficient and sometimes wrong.
  • The BOE has a function that regularly talks to investors to understand:
    • their positioning,
    • their expectations for policy,
    • and what they think about the BOE’s next move.

A Shift in How Central Banks Think

We are already in a new era of central banking

  • Greene argues central banking has changed fundamentally because policymakers face:
    • repeated negative supply shocks,
    • higher uncertainty,
    • and more frequent geopolitical and climate-related disruptions.
  • She says the old rule of simply “looking through” supply shocks is less useful when shocks arrive wave after wave.
  • The future of monetary policy, in her view, is more about:
    • scenario analysis,
    • risk management,
    • and judging how bad policy mistakes could be under different states of the world.

Central banks are not the right tool for fixing supply problems

  • Greene is clear that central banks do not have the right tools to solve supply-side issues directly.
  • Structural problems like productivity, regulation, housing supply, and industrial capacity are largely matters for elected governments, not independent central banks.
  • She suggests there may be a need for more creative policy thinking, but that doesn’t necessarily mean central banks should take over those responsibilities.

Notable Insights

  • “We’re no longer at a point where we can just say one day we might have these shocks happen — we’re already there.”
  • “The real kicker is second-round effects.”
  • “In an age of this much uncertainty, you need to stop thinking only in point forecasts and start thinking in scenarios.”
  • Greene’s core message: inflation risk is still tilted to the upside, even if growth looks weak.

Bottom Line

This episode is a deep dive into how the Bank of England is responding to a world where inflation is driven less by demand and more by repeated supply shocks. Megan Greene argues that the UK remains vulnerable to inflation persistence, especially through energy prices and second-round effects, and that monetary policy must now operate with greater humility, uncertainty, and scenario-based thinking.