Megan Greene, a member of the Bank of England's Monetary Policy Committee (MPC), has warned that strong UK pay growth and anticipated US interest rate cuts could hinder the Bank's ability to lower borrowing costs as much as expected this year. In a speech at the Resolution Foundation, Greene expressed concern that wage growth may have stopped declining, with surveys suggesting employers plan pay rises of 3.5% or more in 2025.
Official figures show wage growth (excluding bonuses) eased slightly to 4.5% between September and November, down from 4.6% in the prior three months. However, inflation rose to 3.4% in December, up from 3.2% in November, remaining above the MPC's 2% target. Greene noted that persistent wage growth could fuel inflation if productivity does not rebound, adding she is 'certainly sceptical' of a productivity recovery this year.
Greene also highlighted that US Federal Reserve rate cuts could boost UK exports and inflation. 'If the Fed were to cut rates more aggressively than the Bank this year, this should cause US demand for UK exports to rebound, providing upward pressure on UK inflation,' she said.
Her remarks follow a Bank of England report acknowledging it consistently underestimated inflation after the 2022 energy price shock, partly due to higher inflation expectations feeding into wages. The Bank pledged to improve its modelling of labour market and wage-price dynamics.
A separate S&P Global purchasing managers' index showed UK businesses reported sharp cost rises in January, driven by 'elevated wage pressures', leading to the steepest price increases in over a year. The survey also indicated job losses, particularly in hospitality, linked to higher national insurance and the national living wage. City economists now expect the first quarter-point rate cut in June, with the base rate currently at 3.75% after four cuts in 2025.
