Bank of England rate-setter Megan Greene has issued a warning that inflation risks are "skewed entirely to the upside." The official, viewed as hawkish, stated it was worth waiting to see developments in the Iran conflict before deciding on a rate hike but emphasized that upside risks to inflation have created a "ratchet effect"—with risks from energy prices and secondary effects tilted upward rather than downward.
In an interview, Greene noted that the UK's weak economy and loose labor market should limit the secondary price effects from a global energy shock. However, she acknowledged that even before the conflict erupted, progress in the UK's fight against inflation had stalled. "We are now facing a negative supply shock, an energy shock, which will push up inflation and drag down growth—a very bad situation for a central bank."
**Inflation Rises, Growth Stalls** Data from the UK's Office for National Statistics shows the Consumer Price Index rose 3.3% year-on-year in March, up from 3.0% in February, marking the largest increase since June 2022, primarily driven by fuel prices. Services inflation unexpectedly climbed to 4.5%, while core inflation edged down slightly to 3.1%.
The Bank of England had previously revised its inflation forecast upward, projecting that inflation could approach 3.5% by mid-2026. The UK think tank NIESR further warned that inflation could rise to 4.1% in the coming months, with the central bank unlikely to achieve its 2% target until 2028.
In contrast to rising inflation, the economic fundamentals continue to deteriorate. UK GDP showed zero quarter-on-quarter growth in January 2026, and the Bank of England has downgraded its 2026 growth forecast to a range of 0.7% to 0.8%. The International Monetary Fund also sharply cut its UK growth forecast from 1.3% to 0.8%, the largest downward revision among advanced economies.
Business confidence has similarly worsened. A Deloitte survey indicated that the net confidence index among chief financial officers plummeted to -57%, hitting its lowest level since the pandemic.
Greene has chosen to wait but warns that inflation risks are now "skewed entirely to the upside." She assesses that slack in the labor market will act as a "buffer" to curb inflation—with the unemployment rate having risen to 5.1% and wage growth slowing to 3.6%. However, she cautioned: "The risks are skewed entirely to the upside. It's a ratchet effect."
**Internal Split 8-1, Rate Hike Option Emerges** Greene did not support an immediate rate increase at the April 30 monetary policy meeting, where the Bank of England voted 8-1 to maintain the benchmark rate at 3.75%. The sole dissenting vote came from Chief Economist Huw Pill, who advocated for an immediate hike.
However, meeting minutes revealed that four other committee members, including Greene, explicitly stated they would support rate increases at future meetings if the energy shock intensifies further. Officials are attempting to gauge whether this surge in inflation could trigger a more concerning price-wage spiral.
Under a worst-case scenario (with oil prices sustained at $130 per barrel), inflation could reach 6.2% in the first quarter of 2027.
Greene explained that a key consideration for holding off on a hike is that "we will get some new information over the next six weeks or so," particularly regarding the trajectory of energy prices. The Bank of England may also need to consider any consequences from domestic political turmoil in the UK. The Labour Party suffered heavy losses in local elections, challenging Prime Minister Keir Starmer's leadership.
The yield on the UK 10-year government bond has climbed above 4.95%, with the 30-year yield once touching 5.62%, a high not seen since 1998. An escalation in political turmoil could raise funding costs, creating a vicious spiral of "rate hike pressure—rising bond yields—political instability."
**Diverging Paths: Bank of England vs. European Central Bank** Notably, compared to the Bank of England, the European Central Bank's rate hike path appears relatively more defined. Correspondingly, economists anticipate the ECB will implement two rate hikes this year—25 basis points each in June and September. This outlook contrasts sharply with prior market expectations of "only one hike" and implies a further increase from the current deposit rate of 2%.
The Eurozone also faces the inflation-growth dilemma. On one hand, inflation remains stubbornly high. A survey of economists conducted from May 4 to 7 indicated that, influenced by the Iran conflict pushing up energy prices, Eurozone inflation for 2026 is now projected to accelerate to 2.9%, up from 2.8% in the previous survey. On the other hand, the economy remains sluggish. Analysts have downgraded their 2026 Eurozone growth forecast from 0.9% to 0.8%, with subsequent years projected to grow by 1.3% and 1.5%, respectively.
Within the ECB, Vice President Luis de Guindos has called for "prudence," warning that activity data in the coming weeks "will not look good." Meanwhile, policymakers like Klaas Knot and Isabel Schnabel have explicitly stated they would take action on rates unless the economic outlook improves significantly.
A common variable for both central banks is the Strait of Hormuz. Since its full closure in March 2026, Brent crude has surged from $71 to $126 per barrel, creating a global daily supply shortfall of 16 million barrels. Greene termed this a "negative supply shock," with the Bank of England warning this scenario "may not be a transitory factor" for inflation.
Although ECB Vice President de Guindos declined to "pre-judge the interest rate decision," he also mentioned in interviews that whether the Strait of Hormuz reopens will be a "very important" consideration at the June meeting.
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