Odd Lots• May 11, 2026• 55:03Interview

The Bank of England's Megan Greene on Monetary Policy in a World of Supply Side Shocks | Odd Lots

From Odd Lots

Megan Greene•External Member, Monetary Policy Committee at the Bank of England

Executive Summary

The traditional central banking strategy of 'looking through' temporary supply shocks is no longer effective in an era of persistent, successive shocks driven by geopolitics and climate change.
Due to high global uncertainty, central bank decision-making must shift from a focus on precise forecasting to a more robust framework of risk management and scenario analysis.
The UK economy faces significant headwinds, including weak underlying growth, a long-term deficit in business investment, and unique monetary policy transmission challenges via its mortgage market.
Persistent supply shocks and heightened public attention to inflation increase the risk of second-round effects on wages and prices, making it harder for central banks to return inflation to target.

12 quotes

Concerns Raised

The traditional monetary policy toolkit is ill-suited for an era of persistent supply-side shocks.
Chronic underinvestment is a long-term drag on the UK's productivity and potential growth.
The rise of 'economic statecraft' will be a persistent source of geopolitical and economic volatility.
Inflation expectations are at risk of becoming de-anchored as households and firms pay closer attention to recurring price shocks.

Opportunities Identified

AI represents a potential, though uncertain, positive supply shock that could boost productivity in the long run.
Adopting a risk management and scenario-based framework could make central bank policy more robust in an uncertain world.

Key Themes

The New Era of Persistent Supply Shocks

The global economy has entered a new regime characterized by frequent and persistent negative supply shocks, driven by factors like geopolitical 'economic statecraft' and climate change. This fundamentally challenges the post-GFC macroeconomic framework, which assumed such shocks were rare and temporary.

This shift invalidates the traditional monetary policy playbook of 'looking through' shocks, forcing a re-evaluation of how to manage inflation and growth when the economy's productive capacity is consistently under threat.

Central Banking Under Uncertainty

With old economic models breaking down, the value of precise, point-based forecasting has diminished. The discussion advocates for a move towards a risk management approach, where policymakers use scenario analysis to weigh the potential costs of being wrong and minimize policy errors.

This change in methodology implies that central bank communication and decisions will be less about hitting specific forecast numbers and more about building resilience against a wider range of potential outcomes, impacting how markets interpret policy.

UK-Specific Economic Challenges

The UK faces a difficult combination of persistent inflation, weak underlying GDP growth, and a chronic lack of business investment that predates Brexit. Furthermore, its mortgage market, dominated by two- and five-year fixed rates, creates a unique and staggered transmission mechanism for monetary policy.

These domestic factors complicate the Bank of England's policy decisions, creating a tightrope walk between taming inflation and avoiding a significant downturn in an already fragile economy.

The Limits of Monetary Policy

Monetary policy tools are designed to manage demand, yet the core economic problems are increasingly on the supply side. The conversation explores the dilemma that central banks cannot directly fix issues like energy infrastructure or investment deficits, and giving them tools to do so would cross into the politically-charged realm of fiscal policy.

This highlights a growing gap between the problems facing modern economies and the tools available to independent central banks, raising long-term questions about institutional mandates and the coordination between monetary and fiscal authorities.

The Potential of AI as a Positive Shock

Amidst a series of negative shocks, Artificial Intelligence stands out as a potential positive supply-side force that could boost productivity. However, its impact is not yet significant enough to be formally included in the Bank of England's economic forecasts, and its timing remains highly uncertain.

While AI offers a glimmer of hope for improving long-term growth trends, policymakers and investors cannot yet rely on it to solve current productivity and inflation problems, making it a key variable to watch for the future.

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Topics

Monetary Policy Central Banking Bank of England UK Economy Inflation Supply Shocks Geopolitics Economic Statecraft Risk Management Scenario Analysis Productivity Business Investment Artificial Intelligence (AI)Labor Market Mortgage Market

Processed May 11, 2026 yt-dlp + mlx-whisper + Gemini

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