The persistently high inflation index warns Bank of England's hawkish officials to be cautious about interest rate cuts.

Megan Greene, a policy maker at the Bank of England, said that there are potential inflationary pressures in the UK that are worrisome, and she presented reasons for caution in lowering interest rates. Greene stated on Monday that while inflation is decreasing, the battle to keep inflation on track is not over yet. She mentioned, "The rate of decline in services sector inflation is not as fast as I would like to see." "Wage growth is higher than the 2% inflation target we would like to see. Wage growth stickiness may be greater than we would hope, so services sector inflation and overall inflation may also be so." She added, "The risks of lowering rates too early or too aggressively are greater than the risks of being slightly slower." Persistent inflation indicators are still too high, causing unease at the Bank of England. These remarks solidify her position as one of the more hawkish members of the Monetary Policy Committee (MPC). The committee has only lowered interest rates twice this year and has hinted at not being eager to loosen monetary policy from restrictive territory. Two days after Greene's speech, official data is expected to show that last month's inflation rate will rise above the 2% target driven by energy price increases. Policy makers are expected to focus on the services sector to confirm that potential price pressures are easing. The Bank of England and many economists expect services sector inflation to stubbornly remain around 5%. Bank of England Governor Bailey and other officials are expected to reiterate their stance on interest rates when they testify in Parliament on Tuesday. They will certainly face questions regarding the expansionary budget announced by the new Labour government on October 30 and Trump's plans to impose tariffs on US imports, which have raised concerns about a global trade war. Greene stated that as an open economy, the UK is increasingly vulnerable to external shocks. "Historically, about a third of the shifts in the UK curve have been influenced by events outside the UK. Now it's only half," she said. "We are all linked to the US treasury curve, and that is certainly true for economies like the UK. So, this brings risks, especially considering geopolitical events, and economic policies that the newly elected president across the ocean might introduce." Greene made these remarks at a discussion on the future of inflation jointly hosted by the London School of Political Economy, the European Institute, and the Official Monetary and Financial Institutions Forum. She mentioned that feedback from businesses suggests wage growth could eventually reach close to 4%, not 2%. Meanwhile, budgetary changes will exacerbate inflation. Greene said that a significant increase in business payroll taxes, along with another raise in the minimum wage, will raise employment costs, but it is unclear how businesses will respond. Greene suggested that companies "may pass on higher costs to end users, leading to higher prices." "Businesses could also respond to this situation by reducing employment, or they could reduce working hours. They may invest in capital rather than labor, so productivity may increase. Or they may just let it eat into their profits." Traders have almost ruled out the possibility of further interest rate cuts in December. They have fully priced in expectations for two more rate cuts by the end of 2025, with a 60% likelihood of a third cut. This would leave the Bank of England slightly behind the Federal Reserve in its easing cycle, far behind the European Central Bank.