"Inflation risk completely skewed to the upside!" Bank of England's Green casts a "hawkish wait-and-see vote" for rate hike.

Bank of England rate setter Megan Greene recently warned that the risk of inflation is "completely tilted to the upside." This hawkish official indicated that it is worth waiting to see how the Iran war progresses before deciding whether to raise interest rates, but emphasized that the upward risks of inflation have formed a "spiral effect" - the risks of energy prices and second-round effects are tilted upwards rather than downwards. In an interview, Greene pointed out that the weak economy and loose labor market in the UK should limit the second-round price effects from global energy shocks, but she admitted that progress in combating inflation in the UK has stalled even before the conflict erupted. "What we are facing now is a negative supply shock, an energy shock, which will push up inflation and drag down growth, creating a very bad situation for the central bank." Inflation up, growth stagnant Data from the UK Office for National Statistics show that CPI rose 3.3% year-on-year in March, higher than 3.0% in February, the largest increase since June 2022, driven mainly by fuel prices. Service inflation unexpectedly rose to 4.5%, but core inflation slightly fell to 3.1%. The Bank of England has already raised its inflation forecasts, expecting mid-term inflation by 2026 to be close to 3.5%. The UK think tank NIESR further warned that inflation could rise to 4.1% in the coming months, and the central bank may not achieve its 2% target until 2028. Contrasting with the rise in inflation is the continued deterioration of the economic fundamentals. In January 2026, UK GDP stagnated quarter-on-quarter, and the Bank of England has lowered its growth forecast for 2026 to 0.7%-0.8%. The IMF has also sharply reduced the UK's growth rate from 1.3% to 0.8%, the largest decrease among advanced economies. Business confidence has also deteriorated, with the Deloitte survey showing that the net confidence index of chief financial officers plummeted to -57%, reaching a new low since the pandemic. Lagarde once pointed out the dilemma: "We have been caught between reacting too quickly and reacting too slowly." Greene chose to wait, but warned that the risks of inflation have "completely tilted to the upside." Greene judged that slack in the labor market would act as a "cushion" to restrain inflation - the unemployment rate has risen to 5.1%, and wage growth has slowed to 3.6%. But she also warned: "The risks are completely tilted to the upside. This is a spiral effect." Internal dissent 8-1, rate hike option emerges Greene did not support an immediate rate hike at the monetary policy meeting on April 30, and the Bank of England voted 8-1 to maintain the base rate at 3.75%. The lone dissenter was Chief Economist Pier, who advocated for an immediate rate hike. However, the meeting minutes showed that four other members, including Greene, had expressed clear support for a rate hike at future meetings if energy shocks further intensify. Officials are trying to assess whether this round of soaring inflation will trigger more concerning price feedback loops. In the worst-case scenario (with oil prices at $130 per barrel), inflation may reach 6.2% in the first quarter of 2027. Greene explained that the key consideration for not raising rates immediately is that "in about six weeks we will have some new information," especially regarding the trend of energy prices. The Bank of England may also need to consider any consequences of political turmoil in the UK. The Labour Party suffered heavy losses in local elections, and Prime Minister Starmer's leadership is facing challenges. The yield on UK 10-year bonds has climbed above 4.95%, and the 30-year yield touched 5.62%, hitting a new high since 1998. If political turmoil worsens, it will raise funding costs, creating a vicious spiral of "rate hikes - rising bond yields - political turmoil." Divergence between British and European central banks, ECB rate hike more definite It is worth noting that compared to the Bank of England, the European Central Bank's path to rate hikes is relatively clear. Correspondingly, economists expect the ECB to raise rates twice this year - by 25 basis points each in June and September. This judgment sharply contrasts with the market's previous expectation of "only one rate hike," and also implies that deposit rates will be further raised from the current 2%. The Eurozone also faces a dilemma of high inflation and low economic growth. On one hand, inflation remains high, a survey of economists conducted from May 4 to 7 showed that due to the impact of higher energy prices caused by the Iran war, Eurozone inflation is expected to accelerate from the previous survey's 2.8% to 2.9% in 2026; on the other hand, the economy continues to struggle, with analysts lowering their Eurozone economic growth expectations for 2026 from the previous 0.9% to 0.8%, followed by growth of 1.3% and 1.5% in the following two years. Within the ECB, Vice President Lane has called for "caution," warning that economic activity data in the coming weeks "will not look good"; while Kazimir and Nedeljkovic have explicitly stated that they will take action to raise rates unless there is a significant improvement in economic outlook. A common factor for both central banks is the Strait of Hormuz. Since the complete closure in March 2026, Brent crude oil has surged from $71 to $126 per barrel, with a global daily supply gap of 16 million barrels. Greene called this a "negative supply shock," and the Bank of England warned that this scenario for inflation "may not be a temporary factor." ECB Vice President Lane, while refusing to "prejudge rate decisions," has repeatedly mentioned in interviews that whether the Strait of Hormuz reopens will be a "very important" consideration at the June meeting.