The shadow of geopolitical risk The Monetary Policy Committee is facing an increasingly complex landscape as global instability converges with domestic inflationary pressures. Megan Greene, an external member of the Bank of England, has delivered a sobering assessment of the UK's economic trajectory, suggesting that the era of high borrowing costs may persist longer than previously anticipated. Speaking to a cohort of economists in London, Greene highlighted that the ongoing conflict in Iran remains a primary driver of the current climate of uncertainty.
The transmission of global shocks The conflict in Iran, which has significantly escalated in recent months, has sent tremors through energy markets and threatened to disrupt vital maritime logistics. For the British economy, which remains sensitive to fluctuations in global commodity prices, this represents a significant tailwind to inflation. Ms. Greene observed that the supply-side shocks emanating from the Middle East are not merely transient. Instead, they risk becoming embedded in domestic expectations, forcing the central bank to maintain a restrictive policy stance to anchor inflation towards the two per cent target.
Economists have long debated the extent to which a central bank can influence price levels that are driven by foreign geopolitical events. However, Ms. Greene argued that the central bank’s duty remains focused on domestic price stability. By maintaining higher interest rates, the Bank of England aims to dampen aggregate demand, thereby preventing the inflationary impulses generated by elevated energy and shipping costs from spiralling into a broader wage-price cycle.
Market reactions and the consumer impact Financial markets have responded to Greene’s commentary with a recalibration of rate expectations. Traders now see a higher probability of the Bank of England holding rates at current levels, or potentially introducing further hikes, well into the next calendar year. This signals a departure from the earlier optimism that interest rate cuts would provide meaningful relief to mortgage holders by the winter of 2026. Businesses are also feeling the weight of this policy trajectory. Capital expenditure, already tepid, remains suppressed as firms struggle to navigate both the cost of credit and the volatility of imported inputs.
The impact on the average household is profound. While inflation has cooled from its historic peaks, the cost of living remains historically high. Persistent interest rate pressures place additional burden on those rolling off fixed-rate mortgage deals, further squeezing disposable income. Analysts caution that the central bank is walking a fine line, balancing the need to tame inflation without triggering an unnecessary contraction in the real economy.
