Looser Fed policy may push up UK inflation, limiting room for swift reductions in the base rate
A sharper shift towards looser monetary policy in the United States could complicate the path of interest rate cuts in the UK and keep domestic inflation pressures elevated, a senior Bank of England (BoE) policymaker has warned.
Megan Greene, a member of the BoE’s monetary policy committee (MPC), said that if the US Federal Reserve were to reduce rates more aggressively than currently expected, the resulting boost to global demand and financial markets could add to UK inflation rather than relieve it.
Greene’s comments, delivered in a speech at the Resolution Foundation, underline the risk that UK policymakers may have to ease more slowly than markets anticipate, even as headline inflation moves closer to the central bank’s 2% target.
She noted that the UK, as a small and open economy, remains exposed to global price dynamics and capital flows. Stronger US demand for UK exports and looser global financial conditions following US rate cuts could push up on prices, reinforcing concerns about inflation persistence in Britain.
Markets currently expect both the Fed and the BoE to lower borrowing costs this year, while the European Central Bank is widely seen holding rates steady. However, investors have increasingly priced in the possibility that the Fed could move more quickly, amid political pressure from US president Donald Trump for faster cuts and ahead of his expected nomination of a new Fed chair.
Greene (pictured right) argued that easier US policy would likely drag down global bond yields, including UK gilt yields, and support equity prices. That would loosen financial conditions in the UK, making credit cheaper for households and businesses and potentially offsetting some of the disinflation the BoE is trying to secure.
For mortgage professionals, such a scenario could translate into lower swap rates and funding costs in the near term, but also into a slower pace of official rate reductions if the MPC judges that underlying inflation risks remain elevated. That would make the timing and scale of future cuts to the Bank rate less certain, even if markets move ahead on expectations.
The BoE reduced its base rate to 3.75% in December, marking a fourth cut in 2025. Greene was among the minority on the nine-member committee who favoured leaving rates unchanged at that meeting, reflecting her greater concern about entrenched price pressures.
Recent inflation data have complicated the picture for policymakers and markets. UK headline inflation edged up to 3.4% in December from 3.2% in November, the first increase in the consumer price index since July and slightly above market forecasts. The BoE still expects inflation to fall back close to 2% around April, helped by fiscal measures including a £150 reduction to the average household energy bill announced in chancellor Rachel Reeves’ autumn budget.
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