Bank of England rate-setter Megan Greene has shared her thoughts on the ongoing drop in inflation. She believes that the recent rise in inflation is due to temporary factors and expects it to return to target levels in the medium term. Greene points out that while there’s a tendency to ignore current inflation levels, there are risks. One concern is that people might spend less, even if interest rates go down. She also predicts that trade fragmentation will lower inflation in the UK and suggests there could be different policy directions in the future. Currently, the market predicts that the Bank of England will reduce interest rates by 38 basis points by the end of the year. Greene’s comments highlight that short spikes in inflation are not seen as signs of a long-term trend. Instead, central bank officials are focused on larger factors that are likely to push inflation back towards target levels over time. These “one-off” factors—like fluctuating energy prices or seasonal variations—are recognized but do not lead to aggressive policy changes. This cautious approach signals that rate-setters are avoiding overreaction to short-term changes. This suggests a careful balancing act. If inflation is viewed as temporary, there will likely be a stable approach instead of sudden rate cuts or hikes. However, Greene raises an important issue: households may not react consistently, even when borrowing costs are lower. Factors like consumer confidence, sentiment, or job market concerns could make people hesitate to spend, even with better borrowing conditions. Greene also points out a more significant shift. Disrupted global trade is becoming a force that keeps prices down. For traders focused on interest rate probabilities, this makes the outlook clearer: over time, lower inflation supported by trade changes may lead to modest or declining interest rates. When Greene talks about policy divergence, she means that not all central banks will act the same way. This is crucial because it suggests that the interest rate paths of major economies may begin to vary. We shouldn’t expect the Bank of England to follow the same timing or scale as the Fed or the ECB. This gives us more flexibility, but it also adds complexity. Currently, futures markets indicate a slight easing, with just under 40 basis points expected by year-end. This doesn’t suggest urgency; it corresponds with a central bank that is aware but not overly concerned. For us, this means we need to pay close attention to data. Labor metrics and core inflation indicators will be more important in predicting short-term price movements than geopolitical events or wage reports. We should be alert for any changes in forward guidance from policy officials, as this could hint at future timing or sequence. For now, Greene’s position suggests we should exercise patience and closely monitor developments rather than engage in speculative optimism or panic. For those managing varying exposure across durations, a flatter interest rate curve may form if policies remain steady amid reducing inflation. Expect gradual alignment with target levels, focusing on the path rather than the speed.

here to set up a live account on VT Markets now