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Forks in the Curve: whether and how to respond to monetary policy divergence - speech by Megan Greene Given at the Resolution Foundation

Full text of Megan Greene's speech:

Discussion has focused on risks to UK monetary policy. @robwoodecon.bsky.social makes the point that any windfall from lower US rates spilling over to larger UK fiscal headroom is likely to spent given the unpopularity of the government.

Sorry to all those experiencing sounds problems with this event - we will post a recording of the event as soon as possible.

In his response @robwoodecon.bsky.social emphasises the importance of the risks from US tariffs, pressure on the Fed and how all this will play out for UK fiscal policy.

Megan Greene wraps up by assessing the risk to the monetary policy outlook. Upside risks from the labour market have diminished but the stickiness of UK inflation remains a concern, particularly given the momentum in wages.

Megan Greene makes the importance of global shocks clear - her analysis shows Fed policy and world shocks have as big an impact on UK inflation as domestic factors.

Megan shows us the importance of US and other global factors in driving the rise in UK government borrowing costs. Is clear that UK specific risk factors increased around the time of the LDI crisis in 2022.

Megan Greene gets us going by showing us that inflation and interest rates are becoming more globally driven.

Here @resolutionfoundation.org we’re hosting Megan Greene of the BoE’s Monetary Policy Committee. Topic for today: how economic conditions are diverging across US and Europe - plenty to talk about! Hearing from @robwoodecon.bsky.social and our very own @ruthcurtice.bsky.social too.

Overall, then, there's nothing in today's public finances data to make the Chancellor choke on her cornflakes in Davos. We get one more release before the Spring Statement, but there's nothing here at least to suggest that the statement will becomes an unwanted fiscal event.

It's tricky to unpick what is going on as we don't have monthly profiles from OBR's Nov fcast. But central gov receipts are ~£3bn lower than March profiles and spending ~£4bn higher. Local authorities continue to overspend. Again this looks broadly consistent with the OBR's high borrowing forecast.

So UK gov borrowing to December (£140.4bn) is above the OBR *November* forecast for borrowing in the whole of 2025-26 (£138bn), and way above its March forecast (£117.7bn). But we're now expecting a big surplus in January (as SA receipts come in) and smallish deficits after that.

Quick word on this morning's public finances data for the UK which were pretty much in line with expectations. Borrowing in December was £11.6bn, slightly lower than market expectations of £13.4bn. Year to date, borrowing is £140.4bn, which looks broadly consistent with the OBR's Nov forecast.

Finally, there shd be better news ahead. BoE is forecasting a large (0.5pp), broad-based fall in CPI in January (with further falls after). So extent of falls in goods and services inf towards more normal levels in Jan will be important. That shd reduce doubts at the BoE about further rate cuts.

The combination of falling wage growth and sticky inflation means that real wage growth is falling back. This is bad news for living standards and requires better growth performance for us to see sustained improvements here.

Services inflation is more important for the BoE as they are domestically driven. Chart on the left shows progress in the 12m rate has been slow and bumpy. But the good news is that higher freq inflation measures (right) look closer to levels consistent with 2% CPI inflation. This is encouraging!

You might expect goods-price inflation to be weak given global factors (goods which wd have gone to the US come to the UK because of higher tariffs). But here domestic factors, including NI and some regulation, mean price rises have been sticky. This *should* reverse later this year.

So where are we on the journey back to 2% inflation? This chart shows goods and services. You can see above target inflation in Dec reflects the fact that *both* are higher than normal (we've hit 2% on avg with goods at about 0.9% and services at 3.4%, they are now 2.2% and 4.5%).

This chart shows contributions to the 0.2pp increase in inflation between Nov and Dec. Biggest factor was tobacco duty which hit in Dec this year (was Nov last year) given the late Budget. But there were rises in (erratic) airfares, as well as a disappointing rise in food prices.

So here's the headline picture - UK inflation at 3.4% in December is the highest in the G7, and has been for 7 months now. A big chunk of why UK inflation is proving so sticky is down to govt policy in the form of higher administered prices and increases in National Insurance.

UK inflation out this morning shows CPI ended 2025 on a 'high', rising 0.2pp to 3.4% for December, the first monthly rise in 5 months, and higher than market expectations. We're now expecting falls in the coming months- big issue for today is how fast they'll come. Short thread on that to follow...

Forget what’s going on up a mountain in Switzerland, here @resolutionfoundation.org we’re talking about UK growth and the government’s struggles to deliver on its key priority. Great panel to chew over where policy can go further. For more, see: www.resolutionfoundation.org/publications...

At RF we are talking prospects for 2026, focusing on growth, living standards and…Zombies! Great panel with @claire-ainsley.bsky.social and @luketryl.bsky.social and our very own Greg Thwaites and @ruthcurtice.bsky.social.

Read our NY outlook here: www.resolutionfoundation.org/publications...

Overall, definitely a 'hawkish' hold from BoE today. This is also bad news for the govt which wants rates to come down faster to boost growth and improve the pub finances. That *could* happen. But message from MPC is that it will need clear evidence that wage growth has slowed decisively.

So markets expect nearly 2 more cuts over the next year. If anything, today's policy decisions suggest BoE might tread even more cautiously. This is bad news for ~730k families coming off 5y fixed-rate mortgages in 2026 and going onto *much* higher rates.

Stairway to headroom • Resolution Foundation The Chancellor’s second tax-rising budget arrived under dark clouds, but forecasts came in better than feared. But even though she was saved from the worst predictions of past weeks, the Chancellor st...

Perhaps most surprisingly, BoE see the Budget *adding* to growth in the near term (albeit not by much). This is surprising given a fiscal tightening of around 0.7% of GDP (although admittedly quite a back loaded one). For more , see: www.resolutionfoundation.org/publications...

More than that, while the BoE says that measures in the Budget should mean inflation is around 0.5ppts lower in the coming months than previously thought (similar to the OBR assessment in the chart below), that won't have much bearing on its view of interest rates going forward.

Again, BoE sees less upside here: most of the Nov surprise to headline inflation is down to food; and the level of underlying services inflation is still to high for many MPC members' comfort.

Again, at first blush, there has been more good news here with headline inf lower than expected in Nov and services inflation - a key measure for the MPC - falling on both the annual rate and higher frequency measures - see below.

Onto the stickiness of inflation. Here the UK remains an outlier relative to other countries with the highest headline inflation in the G7 (albeit with no US data for a couple of months).