World faces permanently higher interest rates, warns Bank of England’s Megan Greene

Consumers face the prospect of permanently higher interest rates amid geopolitical tensions and “slower globalisation”, a Bank of England official has warned.

Megan Greene, an external member of the Monetary Policy Committee, said the last mile of slowing down the pace of inflation would be the hardest as she spoke during an event hosted by the IIF in Washington.

It comes after inflation fell less than expected to 3.2pc in March, prompting money market traders to predict that the Bank of England will only cut interest rates once this year, compared to forecasts of five cuts at the start of 2024.

Policymakers have raised interest rates to 16-year highs of 5.25pc to quell demand in the economy as inflation spiked to a 41-year peak of 11.1pc in October 2022.

Higher interest rates have forced up the cost of mortgages for thousands of home owners and made borrowing harder for consumers.

Ms Greene warned the world could be returning to a period of greater “volatility and uncertainty,” which could push prices higher.

She said: “It could mean…when the dust settles…actually rates will need to be a bit higher than we thought before.”

Ms Greene said uncertainty about the economy had led to businesses holding back investment.

“The more I go around and talk to people, particularly around the UK…we hear about volatility and volatility is causing people to just stay on the sidelines.

“If you actually look at historical context [volatility] isn’t actually that high so I think it’s mostly just this concern that there’s certainly, that causes companies, individuals to deploy capital differently.”

Ms Greene also described the jobs market as “one of the biggest puzzles that we’re grappling with” in the UK and more widely. 

“The labour market is so tight,” she said, adding that its implications for higher productivity were so far unknown. 

“For example, if it’s a result of just freakishly strong labour demand then that can raise productivity growth. If it’s just a reflection of labour hoarding because firms were traumatised by having to rehire and recruit after the economy opened up that actually saps productivity.”

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