In this speech, Megan Greene argues the UK economy is shaped by choices made by other central banks, mainly the Federal Reserve and the European Central Bank. Using history and fresh evidence, she explains how monetary policy divergence impacts UK inflation and growth, and how UK policy should react to the domestic effects.
Speech
Introduction
It’s wonderful to be here with you at the Resolution Foundation today. The turn of the year is a time when we often take stock of where the economy has been and look ahead to the next 12 months. It’s this annual ritual that has motivated my remarks today.
As a monetary policymaker at an inflation-targeting central bank, I spend a lot of time thinking about the future path for UK inflation when setting policy. But it isn’t just the UK’s monetary policy that matters for the evolution of inflation—monetary policy in other jurisdictions can impact our financial conditions and economy as well.
We can determine how markets expect interest rates to evolve by looking at the instantaneous forward OIS curves for the US, UK and euro area (Figure 1). You can see there is difference in the level of policy rates, particularly between the US and UK on the one hand and the euro area on the other, reflecting both cyclical and structural differences in these economies. More importantly, markets are pricing continued rate cuts for the UK and US this year, while the ECB is expected to keep rates on hold. If the markets are to be believed, some monetary policy divergence will emerge in 2026.
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