BoE's Greene Warns Negative Supply Shocks Demand Rate Hike Action

Moody’s announced on 18 May 2026 that Bank of England policymaker Megan Greene warned against misinterpreting the current monetary policy pause as complacency, suggesting an interest rate hike may be necessary in the coming months. She argued that central banks must not look through negative supply shocks, stating the global economy’s resilience is partly due to temporary inventory buffers. Greene highlighted that second-round effects from the ongoing Iran Stalemate, Bond Rout Pressures Global Yields">US-Iran conflict energy price shock are fundamentally lagging indicators, forecasting they will not fully materialize in inflation data for another year, creating a deceptive environment for policymakers.

Context — why this matters now

The current macro backdrop features stable headline inflation but persistent services inflation and wage growth above 4.5% in the UK, with the Bank of England’s base rate held at 5.25%. The triggering catalyst is the protracted conflict between the US and Iran, which has sustained Brent crude oil prices above $85 per barrel for seven consecutive months. This mirrors a historical comparable from the 2022 energy crisis, where similar supply-driven price spikes led to a 12-month lag before core inflation in the UK peaked at 7.1% in May 2023. What changed is the depletion of corporate and national inventory buffers that initially absorbed the shock, forcing price pressures into the real economy.

Data — what the numbers show

UK services inflation remained elevated at 5.7% in April 2026, significantly above the Bank of England’s 2% target. Wage growth, a key concern, printed at 4.8% for the first quarter, down from 5.6% a year prior but still problematic. The benchmark UK 2-year gilt yield, sensitive to rate expectations, rose 8 basis points to 4.42% following Greene’s remarks. This contrasts with the US 2-year Treasury yield at 4.31%, indicating diverging near-term policy expectations. Private inventory investment contributed 0.4 percentage points to UK Q1 GDP growth, a buffer Greene identified as temporary.

Metric	Pre-Shock Level (Q4 2025)	Current Level (Q1 2026)
Brent Crude (avg $/bbl)	78.50	86.20
UK Core Inflation	3.2%	3.5%

The UK FTSE 100 Energy sector index has gained 14% year-to-date, outperforming the broader FTSE 100’s 2% gain.

Analysis — what it means for markets / sectors / tickers

Second-order effects will manifest in sectors with high energy and wage intensity. Consumer discretionary firms like Next PLC (NXT.L) and Marks & Spencer (MKS.L) face margin compression risk exceeding 150 basis points from sustained input cost pressures. Conversely, energy producers BP (BP.L) and Shell (SHEL.L) benefit from sustained higher prices, with cash flow projections revised upward by 8-12%. The primary counter-argument is that global demand remains weak, potentially capping commodity prices and allowing disinflation to resume without further policy tightening. Market positioning data shows asset managers increasing short positions in UK retail sector ETFs while hedge funds add to long oil futures. Flow is moving into defensive utilities and out of rate-sensitive real estate investment trusts.

Outlook — what to watch next

The primary catalyst is the next Bank of England Monetary Policy Committee decision and minutes on 19 June 2026. The UK Consumer Price Index release for May, scheduled for 18 June 2026, will provide critical data on services inflation persistence. A break above 4.50% for the UK 2-year gilt yield would signal markets pricing in a high probability of a 25 basis point hike. A sustained move in Brent crude above the $90 per barrel level would validate Greene's supply shock concerns and force a broader repricing of UK rate expectations.

Frequently Asked Questions

What does a negative supply shock mean for inflation?

A negative supply shock reduces the economy’s productive capacity, increasing costs for businesses regardless of demand. This creates cost-push inflation, which is harder for central banks to tackle without damaging growth. Unlike demand-pull inflation, cooling the economy via higher rates does not fix broken supply chains or geopolitical conflicts, creating the policy dilemma Greene describes. Historical analysis of the 1970s oil crises shows such shocks can embed inflation expectations for years.

How do second-round effects differ from initial price spikes?

Initial effects are the direct pass-through of higher input costs, like fuel surcharges on shipping. Second-round effects occur when these higher costs trigger wage-price spirals, as workers demand compensation and businesses raise prices further to protect margins. These effects have a documented lag of 12-18 months and become embedded in core inflation measures, making them more persistent and structurally damaging to price stability.

Which asset classes are most vulnerable to a hawkish BoE pivot?

Long-duration UK gilts and sterling corporate bonds are most sensitive, as higher rates reduce the present value of future cash flows. The iShares Core UK Gilts UCITS ETF is a key benchmark. UK homebuilder stocks like Persimmon (PSN.L) and Barratt Developments (BDEV.L) are also highly vulnerable due to their reliance on mortgage financing, with valuations typically contracting 15-20% for every 100 basis point rise in the base rate.

Bottom Line

Megan Greene’s warning signals the Bank of England is preparing to prioritize inflation containment over growth, even if data appears temporarily benign.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.