Bank of England policymaker Megan Greene is worried that the current monetary policy might not be strict enough. She believes that managing inflation risk should guide BoE policy, especially since household expectations are at their highest. The recent wage data came in lower than expected, which is a relief. However, surveys show that future wage increases might be higher than desired. Greene is concerned about ongoing inflation in the UK and suggests that stricter monetary measures may be necessary.

BoE Commentary on Inflation Persistence

FXStreet’s BoE Speechtracker rated Greene’s comments as hawkish, giving them a score of 8.0. Despite this, the GBP/USD fell by 0.4%, trading near 1.3120. The Bank of England sets the base lending rate, which influences overall interest rates and the value of the Pound Sterling. The BoE raises rates to fight inflation, making the UK appealing for international financial activities. On the other hand, lower rates can encourage investment during slow growth periods, which may weaken the Pound. In extreme cases, the BoE might resort to Quantitative Easing, which often reduces the value of Sterling by adding more credit to the system. In contrast, Quantitative Tightening boosts Sterling by limiting credit flow and stopping bond purchases, which can strengthen the economy and inflation.

Interest Rate Market Challenges

A senior Bank of England official is indicating that current interest rates may not be sufficient to manage inflation. This opinion arises from worries that inflation could remain a long-lasting issue in the UK. It suggests that monetary policy may need to be more restrictive than the market expects. Recent data supports this concern. The October 2025 inflation rate from the ONS shows CPI at 3.1%, still above the 2% target. Although recent wage data was a bit lower than expected, average weekly earnings are growing at an annual rate of 4.5%, raising concerns about future price increases. These comments cast doubt on the market’s belief that the Bank Rate, held steady at 5.0% since May 2025, is set to decrease. If inflation remains persistent, as Greene suggests, the market may be underestimating the chance that rates will stay high into 2026. Therefore, we need to reassess any positions betting on significant rate cuts in the next six to nine months. For traders dealing in derivatives, this means we should think about buying volatility on short-sterling interest rate futures. Options strategies like straddles could be useful if we expect the Bank to take a more hawkish approach than the market currently anticipates. This view suggests a period of increased uncertainty regarding UK interest rates. We might also consider interest rate swaps to bet that the market is too aggressive in its pricing for rate cuts in the first half of 2026. A strategy that pays a fixed rate in exchange for a floating rate could be profitable if the BoE maintains or raises rates from here. This would align with the policymaker’s assertion that the current policy is not yet adequately restrictive. It’s worth remembering how persistent inflation was back in 2023, remaining high longer than expected. As a result, the Bank had to keep a tight policy for an extended period. Current comments indicate we might be facing a similar situation, suggesting that the market’s hopes for easier policies could be premature. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now