From BOE's Greene speech at the University of Glasgow:
Megan Greene argues that the conventional wisdom that central banks should look through supply shocks needs to be reconsidered. She examines the UK’s recent experience with a pandemic and war in Ukraine to highlight lessons for central banks on how to think about supply shocks and adjust policy in response to them. She suggests that we are entering an age in which supply shocks are likely to be more frequent and severe, driven by factors like climate change and geopolitical tensions.
She adds:
Monetary policymakers have tended to look through supply shocks. I think we may need to rethink this approach
I am not in favour of policy reversals by central banks
Appropriate response to the uncertainty and risks we are currently facing should involve a cautious approach to rate cuts going forward
When there is uncertainty around intrinsic inflation persistence, as there currently is, a monetary policymaker should respond to inflation
Inflation may respond to monetary policy more quickly than output when inflation has exceeded the target for an extended period
In this environment, monetary policymakers should offset supply shocks
The risks to our inflation outlook have shifted to the upside
The risks of weaker demand have not disappeared, but to my mind they have diminished
I am less concerned about a rapid decline in the labour market
For a complete read of her speech, go HERE
