Bank of England's Greene worries about excess pay growth in 2026, Fed outlook

By David Milliken

LONDON, Jan 23 (Reuters) - Bank of England policymaker Megan Greene said on Friday she remained concerned about how much businesses intend to raise wages this year and the challenge it could pose to the BoE achieving its 2% inflation target.

Greene also said the BoE should not follow in the footsteps of the Federal Reserve if the U.S. central bank cuts interest rates aggressively this year - something investors see as a possibility given pressure from President Donald Trump.

The BoE's Monetary Policy Committee voted 5-4 last month to cut its key interest rate to 3.75% from 4%. Greene opposed the move.

GREENE FOCUSED ON INFLATION AND WAGE EXPECTATIONS

Although BoE Governor Andrew Bailey has forecast that inflation will fall from 3.4% in December to around 2% by April or May, much of that is due to one-off factors.

"I will be watching household and business inflation expectations over the next few months to see if they come down in line with lower inflation outturns. Even more concerning, in my view, are the forward indicators for wage growth," Greene said in a speech to the Resolution Foundation think tank.

Private sector wage growth slowed to an annual rate of 3.6% in the three months to November, its lowest level in five years.

But Greene said the drop reflected high wage growth in late 2024 and "our outlook for next year is that this decline may have run its course".

Preliminary results from a BoE survey of businesses due out next month pointed to 2026 wage growth of 3.5%, above the level of 3% or just over that was consistent with 2% inflation in the medium term, Greene said.

Unemployment is rising - which normally would push down on wage growth - but Greene said there was a risk that this linkage had weakened since the COVID-19 pandemic.

FED RATE CUTS LIKELY TO PUSH UP UK INFLATION

Most of Greene's speech focused on how changes in Fed interest rates affect Britain.

Investors often took the view, she said, that when the Fed cuts rates, the BoE comes under pressure to follow suit to stop sterling from strengthening against the dollar, which would make British exports less competitive, growth slower and inflation fall below target.

Greene said this explanation was too simple, as U.S. rate cuts also tended to lower British government borrowing costs and push up the share prices of British companies, helping the economy.

New analysis by Greene and BoE colleagues suggested that a surprise loosening of Fed policy would, on balance, be likely to put upward pressure on British inflation.

"This would, in my view, give even greater cause for concern about a risk of UK inflation persistence ... warranting a slower withdrawal of monetary policy restriction in the UK," she said.