Megan Greene, a member of the Bank of England’s Monetary Policy Committee, said UK households and businesses appear more sensitive to rising inflation than in the past. She set out a balance of risks in which the cost of failing to respond to persistent inflation is greater than the cost of tightening policy unnecessarily.
Greene said that if energy prices led to stronger second-round effects on inflation, interest rates might need to rise. She also said acting sooner on rates can matter as much as the eventual magnitude of the response, and that she places a relatively high weight on stabilising prices over supporting economic output.
Policy Direction and Market Positioning
Given the heightened sensitivity of UK households and businesses to price increases, we believe the Monetary Policy Committee is leaning towards a more aggressive stance. The latest CPI data from May 2026 showed inflation remaining sticky at 3.1%, well above target and justifying a policy that prioritizes price stability over near-term output. This view holds even as the last quarterly GDP figures showed a minor 0.1% contraction, signaling a willingness to accept economic weakness to defeat inflation.
The clear warning about energy prices triggering second-round effects is particularly timely. With Brent crude futures rising over 8% in the past two weeks to near $95 a barrel, the risk of this scenario is increasing. We are now pricing in a much higher probability that the MPC will act preemptively to prevent these energy costs from feeding into wages and broader services inflation.
In the coming weeks, we will be adjusting interest rate positions to reflect this hawkish tilt. We are selling Short Sterling or SONIA-linked futures, anticipating that the market will have to price in at least one more full 25 basis point rate hike before year-end. This strategy positions us for a repricing of the UK yield curve, where short-term rates rise faster than market consensus currently expects.
Impact on Currency and Volatility Strategies
This policy bias also suggests renewed strength for the pound. A central bank that acts sooner and more decisively on inflation tends to support its currency. We see opportunities in buying GBP/USD call options to profit from potential upside in Sterling, while also considering put options on the FTSE 100 as higher borrowing costs could weigh on UK equities.
This proactive policy approach is reminiscent of the aggressive hiking cycle seen in 2022-2023, where the Bank acted forcefully once inflation became entrenched. The emphasis on acting sooner rather than later suggests that upcoming policy meetings, previously seen as uneventful, are now “live” for a potential rate move. Consequently, we are looking to buy interest rate volatility through instruments like swaptions, as the range of potential outcomes for the Bank Rate has now widened considerably.
