The Bank of England’s newest policy maker Megan Greene warned that interest rates may settle at higher levels permanently as a wave of green and artificial intelligence investments promises to boost economic growth.
Greene cautioned against complacency in the fight against inflation and questioned claims that the long-run neutral interest rate remains at its pre-pandemic lows despite a painful surge in prices.
“It would be a mistake for central bankers to take comfort in the notion that inflation and rates will automatically go back to the low levels we saw before the pandemic,” she wrote in an article in the Financial Times published Monday. “This is their challenge for the future.”
The comments suggest Greene is willing to back further interest rate increases when she joins the Monetary Policy Committee on July 5. It indicates that Greene will be more hawkish than her predecessor, Silvana Tenreyro, who was one of the most dovish members of the nine-member panel.
Greene’s views on the long-run neutral interest rate — a level that is neither restrictive or accomodative, also known as R* — are at odds with those of Governor Andrew Bailey, who said in March that it is “not unreasonable to expect that R* will remain low.”
Many central bankers assumed that interest rates would remain low permanently following the financial crisis and a decade of ultra-loose monetary policy. However, the current inflation surge around the world has raised questions over whether interest rates will return to the low levels households and businesses have enjoyed.
Greene said it’s “too early” to say whether the neutral rate is still at pre-pandemic levels but added it could be boosted if a global savings glut and sluggish productivity growth is reversed.
“Investment in green infrastructure and subsidies may not only pare global savings but could generate a wave of innovation that boosts productivity,” said Greene.
“Artificial intelligence and machine learning developments are likely to progress exponentially, and their impact on productivity and growth may come sooner than expected. All of this could boost potential growth and send R* higher.”
(Updates with details from the first paragraph.)
