Don’t assume rates and inflation will settle back down – BoE’s Greene

LONDON (Reuters) – Megan Greene, who is due to join the Bank of England’s Monetary Policy Committee this week, said central banks should not assume that interest rates will settle back down at their pre-coronavirus levels along with lower inflation.

In a column published by the Financial Times on Monday, Greene said it was unclear if a long-term downward trend in the underlying rate of interest in the world economy would resume, or if other factors would push it up.

“But it would be a mistake for central bankers to take comfort in the notion that inflation and rates will automatically go back to the low levels we saw before the pandemic. This is their challenge for the future,” she said.

Greene is due to start as a member of the MPC on July 3, with the BoE trying to curb what is the highest inflation rate among leading developed economies.

Last week, BoE Governor Andrew Bailey said it remained to be seen if investors were right to think that the British central bank would cut rates quite quickly after hitting a new peak.

Greene, a U.S. economist, said in June that the BoE may have a tough job returning British inflation to its 2% target.

In her column for the FT, Greene said it was possible that the neutral rate of interest – or r-star – had risen and monetary policy was not as tight as central bankers thought, or that it would rise in the future due to factors including a possible boost to innovation and productivity from the shift to green technology.

“Meanwhile artificial Intelligence and machine learning developments are likely to progress exponentially, and their impact on productivity and growth may come sooner than expected,” she said.

“All of this could boost potential growth and send r-star higher.”

Greene will replace MPC member Silvana Tenreyro who has voted to keep interest rates on hold at recent meetings.

(Writing by William Schomberg; editing by David Milliken and William James)