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Treasury Committee 

Oral evidence: Appointment of Megan Greene to the Monetary Policy Committee, HC 1395

Tuesday 13 June 2023

Ordered by the House of Commons to be published on 13 June 2023.

Watch the meeting

Members present: Harriet Baldwin (Chair); Rushanara Ali; Mr John Baron; Dame Angela Eagle; Emma Hardy; Dame Andrea Leadsom.

Questions 1 - 99


I: Megan Greene.

Examination of Witness

Witness: Megan Greene.

Q1                Chair: Welcome to the Treasury Committee’s evidence session on Megan Greene’s proposed appointment to the Bank of England Monetary Policy Committee. Pre-appointment hearings of this kind are an important part of our work, and I am very grateful to you for coming in to speak to us this morning. Can I start by inviting you to introduce yourself?

Megan Greene: I am Megan Greene. I have been appointed to be an external member of the Monetary Policy Committee at the Bank of England.

Q2                Chair: The Committee has received your CV and the reply to the questionnaire that we sent you, and we will be publishing that simultaneously with this session. I noticed, in looking through your background, that you are a regular commentator in the Financial Times. I just wanted to clarify whether it is your intention to carry on using that platform to commentate on the UK monetary policy situation.

Megan Greene: No. I will be giving up my regular column in the Financial Times, alongside a number of other roles that I have filled up until now. It might be useful to use commentary occasionally in various outlets to transmit messages about monetary policy, but my regular column will not continue.

Q3                Chair: I just wanted to clarify that, because there are a number of roles that you are going to carry on, one of which is this teaching role at Tsinghua University in China. Can you tell us a bit more about that?

Megan Greene: I teach a couple of seminars on global inequality at Schwarzman College, which is an international campus based in Tsinghua University, so it is mostly international students, with a few Chinese students as well. I will do most of that teaching remotely. I will go over for one lecture, probably over the holidays, so hopefully I am the only one working and no one else will be either. I know that I will be entirely off-grid while in Beijing.

Q4                Chair: Do you see that work as being, effectively and ultimately, funded by the Chinese Government?

Megan Greene: No. Schwarzman College is a US organisation.

Q5                Chair: So the students at that college in China pay their fees to the US university.

Megan Greene: The students at Schwarzman College pay their fees to a US programme, yes.

Q6                Chair: I noticed that you had also done some work for the Hong Kong Stock Exchange over recent months. Can you tell us whether that is something that you would do again while you serve as a member of the Monetary Policy Committee?

Megan Greene: No. I have already resigned from that role. I was on the International Advisory Council for the board of the Hong Kong Stock Exchange for a few short months, but I have already resigned from that role.

Q7                Chair: That was after the Chinese took over Hong Kong and repressed public protest there.

Megan Greene: Yes. It was in March that I went over to provide a US and European perspective for the board of the Hong Kong Stock Exchange.

Q8                Chair: Would you consider doing that kind of work again in your role as a Monetary Policy Committee member?

Megan Greene: No.

Q9                Chair: What is your view on the situation in Hong Kong politically?

Megan Greene: As an external member of the MPC, my views on politics are not particularly relevant. It feeds into the economics of what is going on, but, as an economist, I do not really focus on the politics.

Q10            Chair: Can you confirm for the Committee that you have never been a member of any political party in either the US or the UK?

Megan Greene: I have been a member of a political party in the US.

Q11            Chair: Could you clarify which one for the Committee, please?

Megan Greene: I have been a member of both political parties at various times in the US, so Republican and Democrat.

Q12            Chair: You are currently not a member of any political party.

Megan Greene: I am a member of the Democrat party.

Q13            Chair: You are currently a member of a political party in the United States.

Megan Greene: I am registered to vote as a Democrat. We do not have party memberships.

Q14            Chair: Do you pay a political subscription to do that?

Megan Greene: No.

Q15            Chair: It is not like here in the UK.

Megan Greene: No. You just register to vote as Democrat, Republican or independent.

Q16            Chair: Do you think that is that something that is consistent with being a member of the UK’s Monetary Policy Committee?

Megan Greene: I think it is totally irrelevant to what I do as a member of the Monetary Policy Committee in the UK.

Q17            Chair: One of the things that we are keen to explore with you today is around your communications style, simply because, when members of the Monetary Policy Committee communicate, their words have very close scrutiny here in the UK. I can cite the way in which, for example, the chief economist Huw Pill’s words recently got a lot of media coverage and traction. You are someone who is very used to communicating through the media. You are someone who has a lot of experience communicating through the media. What would you say, in your role as member of the Monetary Policy Committee, you are planning to do in terms of your communications, and also, quite interestingly, your communication style?

Megan Greene: Given my background, I have a lot of experience communicating with a lot of different audiences. I teach graduate students, for example, who may or may not have ever taken economics before, even though I am teaching economic issues. I communicate with retail investors and institutional investors of very different levels of sophistication. I communicate with policymakers regularly. I communicate with CEOs and CFOs, but also business leaders in the corporate sector. One of the strengths that I might bring to the MPC is this ability to communicate with so many different audiences and boil down quite wonky subjects into plain English for the audience.

Q18            Chair: Do you mean like “moron premium”?

Megan Greene: Yes, as a term that was first floated by TS Lombard. Boiling things down into shorter, digestible formats has been a strength of mine. I also think that the Bank of England has done a lot to improve its communications over the past decade or so, but more can always be done.

I am really looking forward to contributing to that in various ways—for example, by giving potentially shorter, more digestible speeches, by using occasional op-eds in the media to communicate in plain English what the Bank is thinking around its monetary policy stance, by going and visiting the agencies and having a two-way exchange of information in that way, which I am really excited about, and also by going to schools and being part of that outreach. It is important to make sure that we are all speaking the same language, so that the Bank of England’s communication can be translated and we can be as transparent as possible.

Q19            Chair: You used in your questionnaire the phrase “top-down and bottom-up metrics of the labour force dynamics”. You would agree that is not the kind of communication style that you are referring to in your comments there.

Megan Greene: That is right. I was communicating for the audience that I was writing for.

Q20            Chair: You say in your questionnaire that you “have a long track record of making out-of-consensus calls that ultimately came to fruition, while building support for them across various different stakeholders”. Could you tell me, as of this moment, what your current out-of-consensus call is?

Megan Greene: My current out-of-consensus call is nothing to do with the UK, but is probably around China’s recovery. As a global economist, up until now, looking at China’s recovery there has been a lot of disappointment with the recent data showing that some of the monthly indicators are petering out. I expected them to peter out.

This recovery will probably look different from what previous Chinese recoveries have looked like, in that it will be consumption-led rather than investment-led. A lot of the weakness that we are seeing in the data is on the investment side, and I expected that, so I am not particularly worried about the Chinese recovery.

China will probably exceed the Communist Party’s target of 5% growth this year. The spillovers for the rest of the world will be different as well. On the downside, the growth spillovers will be smaller, because it will mostly be Chinese consumers buying domestic services instead of importing capital goods from elsewhere. The good news is that the inflation spillover will probably be less as well, when most of the developed world has an inflation issue.

Chair: That is a great segue, because we are now going to start talking about the Bank of England’s inflation models.

Q21            Dame Andrea Leadsom: Good morning. First of all, is it fair and reasonable for the Government to require a particular interest rate policy from the Bank of England in order to fulfil Government objectives?

Megan Greene: It is fair and reasonable for the Government to set the remit for the Bank of England, as it does, but central bank independence is quite important in terms of trying to achieve that remit independently of any political agenda. It is great for the Government to set the remit but, as you see in most developed economies, the central bank tends to be independent. That is really important in order for the central bank to have the leeway to try to achieve that remit.

Q22            Dame Andrea Leadsom: You made some comments about how policy should require preferential interest rates for green investments. Do you stand by those?

Megan Greene: Yes. I want to be clear that I wrote that commentary over a year ago in a very different capacityas a thought leadertrying to figure out how to mobilise private capital to encourage the green transition, which most developed economies have not achieved yet. That was the capacity in which I wrote that. As I said previously, it is the Government’s job to set the remit for the Bank of England, and so, as a member of the Monetary Policy Committee, it is really not up to me what the remit is.

Q23            Dame Andrea Leadsom: But you can see that there is an inconsistency there that might concern people.

Megan Greene: What is the inconsistency?

Q24            Dame Andrea Leadsom: Your view was that there should be preferential interest rates to drive green growth, but now, one year on, your view has changed because you are trying to become a member of the Monetary Policy Committee, which quite clearly requires central bank independence.

Megan Greene: If the Government decided that it were the most important thing to try to get the central bank to encourage private capital, that is one way to do it, but that is up to the Government, not members of the MPC.

Q25            Dame Andrea Leadsom: Just to be clear, that would then require differential monetary tools to be used by the central bank that is supposed to be independent, and, presumably, some decision on where your interest rate setting was higher and lower in order to encourage this central policy of Government. At the moment, as you know, Government have a remit for inflation, but, if Government were to say, “In addition to that, we have a remit for the cost of funding green finance”, how does that sit with central bank independence in monetary policy terms?

Megan Greene: If the Government set that as a remit, it would be up to the Bank of England to try to implement it as best it could. The proposal that I had written about is one proposal with pros and cons. I also highlighted the cons, one being a concern about central bank independence. Ultimately, because it is a slippery slope, the Government can say whatever pet project they want as part of the remit, and the central bank would be stuck trying to accommodate that. That is, admittedly, one of the downsides and something that I highlighted myself, but, if the Government set a remit, it is important for the central bank to be able to operate freely to try to achieve that remit as best it can.

Q26            Dame Andrea Leadsom: Turning now to inflation, are you concerned about the Bank’s inflation forecasting models?

Megan Greene: I have not seen the models. In fairness, I have hardly been in the building.

Q27            Dame Andrea Leadsom: You have seen the outcomes, though.

Megan Greene: Yes, I have seen the outcomes. Generally, DSGE models that everyone is using—

Chair: Sorry, just for the Committee, could you spell out acronyms?

Megan Greene: Sorry—dynamic stochastic general equilibrium models, which are the standard models that most forecasters are using. Again, I have not seen the Bank of England’s models, but some of them are based on this. They are great at highlighting the connections between a country’s balance sheet. They are great at highlighting linear changes.

They are not as great at highlighting non-linear changes, and that is why judgment has to come into it, which is always a part of forecasting. Part of it is seeing what the model provides, and part of it is, of course, a forecaster’s judgment. In an incredibly uncertain environment, that judgment probably comes in more where people are looking at the risks and highlighting them more than you would during regular times.

Q28            Dame Andrea Leadsom: Are you, therefore, concluding that models are not very useful in the current environment? Secondly, do you have experience of interrogating forecasting models and adjusting them, or do you just conclude, “Since it is not reliable, we will just have to use our finger-in-the-air judgment”?

Megan Greene: I am not saying that models are not useful at all. As I said, they are really helpful in understanding the connections between a country’s balance sheet. When there are linear changes, they are incredibly useful, but it is these non-linear shocks in both directions that they do not always capture accurately. Again, that is where judgment comes in. Models are constantly evolving. Economists are learning quite a lot from epidemiological models these days and looking at agent-based models with very complex actors in a simple world, and so I would say that they are improving constantly.

I had a long history of using forecasting models as an economist at the Economist Intelligence Unit. I built my own when I was an economist at Roubini Global Economics, and I ran a macro forecasting team at John Hancock/Manulife, so I have a lot of experience with these models. They are very helpful as guides, but they are never bang on, and so judgment always comes into it.

Q29            Dame Andrea Leadsom: What would you change about the way that the Bank is using forecasting models at the moment? I understand that you have not seen the models, but, overall, what do you think is missing in their toolkit?

Megan Greene: Not only have I not seen the models, but I do not know how they are using the models, because I have not been part of that process, so it is hard for me to say what might change, other than that having a healthy debate, which I am sure they do, about where the risks really lie and baking that into forecasts is incredibly important.

Q30            Chair: One of the things that surprised us recently in Huw Pill’s evidence that he gave us was that the Bank of England’s model focuses, really, on the last 30 years since the Bank was made independent, and does not focus so much on the last time we had a major exogenous shock from an energy market, which was the 1970s, and how badly inflation got out of control in the 1970s. I do not know if you have followed that or have any initial thoughts on what time period the Bank’s models ought to be looking at.

Megan Greene: The models are looking at the period over which the Bank was inflation targeting, because that is the regime that we are in. The important thing about the 1990s and 1970s is the lesson that everyone has learned, which is that, if you engage in stop/start monetary policy, you may end up having to tighten even more and generating an even worse recession on the other side.

Also, inflation expectations cannot be allowed to become de-anchored, or you end up in that situation. That is the most important thing to glean from the 1970s and 1980s, and that that might not necessarily show up in a model. Just knowing that is probably the important piece.

Q31            Mr Baron: Good morning, Megan. I hear what you say about communication, and that is welcome, but what I find slightly worrying from what you have said so far is that you have not picked up as much as I and we would like on the fact that all central bank forecasting—the Bank of England is not an exception—has been woefully inadequate when it comes to inflation.

What I want to hear more about from you, if you do not mind, is what you are going to try to do to improve that. What fresh thinking are you going to bring? We have had a few sessions now with the Bank of England and they say, “You cannot predict shocks”. Of course, you cannot predict shocks, but they have often cited Ukraine as an example of an external shock, which is why inflation took off, but inflation was over 6% before the invasion of Ukraine. Inflation had been rising steeply before then, but interest rates in this country were still 0.5%. It is woefully inadequate if you are trying to keep inflation to around 2% and below, so what fresh thinking are you going to bring on that?

Megan Greene: It is worth highlighting that policymakers do not have the benefit of hindsight, so you have to make policy in real time.

Q32            Mr Baron: We are not talking about hindsight here. What we are talking about is a period of monetary policy where there were clear signs of inflation building. Money supply figures were up. We can have a debate about whether the big phase of quantitative easing contributed to that, but I am not asking about that. There were clear signs of inflation in the economy. Inflation before Ukraine was running at 6%, and interest rates in this country were 0.5%. It is not just the Bank of England but central bank policy generally. They do not seem to have models that can cope with reality, and I am not talking about hindsight. What are you going to bring fresh to the table that tries to improve the accuracy of the modelling?

Megan Greene: If you look at the drivers of inflation right before Russia invaded Ukraine, they were largely a massive shift in demand away from a multi-decade trend of people buying services towards, all of a sudden, people buying goods. You also had the reopening, which generated a lot of demand. Energy and food prices had already started going up, so you did have this shock from Covid.

You had global supply chains that were completely gummed up, and so it is just worth highlighting that, at the time, it was not unreasonable for the Bank of England, the Fed, the ECB or any other major central bank to look at those global supply chain snafus, for example, and think, “Those are probably transitory. As it turns out, if you look at various metrics by the sell side but also by the New York Fed in terms of global supply chain tightness indices, global supply chains have returned to the looseness that they were at before the pandemic.

At the time, that was the big driver of inflation before Russia invaded Ukraine, and it was reasonable to consider that as transient. That is why I highlight that policymakers do not have the benefit of hindsight. They have the data that they have before them. Then Russia invaded Ukraine, of course, which created a new shock in terms of energy and food price. There are now some second-round effects that seem to be seeping in, which central banks need to be concerned about.

Q33            Mr Baron: You are an economist who has looked back over many decades at interest rates, inflation and so forth. I do not think that there has been a period when inflation has hit double figures and then fallen back to more normal levels within a few years. The Bank of England is producing two figures at the moment. It recently upgraded its end-of-year inflation forecast to 5.1% from 3.9%. The OBR estimates 2.9%, but the Bank of England also has a figure out there of 4%. Why is it going to be different this time? The consensus, certainly in this country and probably across the pond, is that inflation is going to fall away very quickly. I just question whether we have got this right as well.

Megan Greene: I will focus on the UK, because the drivers of inflation in the US are a little different. In the UK, about half of inflation is food and energy-driven, and we have seen energy costs come down already. Food costs remain persistently high, and it has been a surprise to me that they remained high for so long, but I do think that base effects will help. A lot of companies signed up for longer-term contracts. In fact, this goes for food inflation as well. You had a lot of higher prices locked in for longer, because everyone was worried about supply, and so it is taking longer to run off than we had thought, but I do think that, over the next year, a lot of that should come out as a driver of inflation.

Q34            Mr Baron: So you are confident in the Bank of England’s inflation forecasts at year-end.

Megan Greene: It is reasonable to think that inflation should come down fairly quickly over the next year. There is also some underlying persistence, and so getting from 10% to 5%—and this goes for every major jurisdiction—is probably easier than getting from 5% to 2%.

Q35            Mr Baron: There is a debate, but interest rate increases usually have a nine-to-12-month lag effect before they hit the real economy. If you believe the end-of-year forecasts, is the Bank of England right to still be raising interest rates?

Megan Greene: I have hardly been in the building. I have not been privy to any models, any conversations or any analysis. I just have what is available to you.

Q36            Mr Baron: If I may suggest, Megan, you are a highly rated economist. Even though you do not know how the modelling works, and given that interest rate rises can have as long as 12 months—some say 15 months—before they hit the real economy, do you believe, from the outside, from what you see and from your expertise, that the Bank of England is correct in still increasing interest rates when their end-of-year forecast is saying that inflation is not a problem or is at least coming down significantly?

Megan Greene: I would highlight that I do not think that they are saying that it is not a problem. By the end of the year, it will be above the target. There is conventional wisdom in the academic literature about the lag of monetary policy, but that has also been questioned by a lot of senior central bankers, and so there is some uncertainty around how quick the transmission mechanism is, particularly around financial conditions. Messages get baked into markets immediately, and so it is possible that it is a little bit faster now than it has been in the past.

If the inflation target remains above what the Bank of England’s remit suggests, the Bank of England needs to look at the drivers and, if they are persistent, to lean against those, because the worst thing would be to have inflation expectations become de-anchored. As I said, that is the lesson that we learned from the 1970s and 1980s. If that happens, you end up having to hike even more, and every central bank is trying to avoid that.

Q37            Mr Baron: I am sorry but I did not quite pick up a clear answer there. In short, is the Bank of England right or not to be increasing interest rates at the moment?

Megan Greene: I have not seen any of the inside data, so I would want to be part of those conversations in order to answer competently, of course. As an outsider with access to what you have, I think the Bank of England is right to be concerned about some of the second-round effects of inflation.

Q38            Mr Baron: You think they right to be increasing interest rates, from what you see.

Megan Greene: They are right to look at the drivers and to lean against those.

Q39            Mr Baron: I am not asking about the drivers. I am asking, if you do not mind, whether, from where you sit, the Bank of England is correct in increasing interest rates at this point in time.

Megan Greene: Their forecasts are perfectly reasonable, based on the information that I have. Like the Bank of England, I would want to interrogate the data as it is coming out.

Q40            Mr Baron: You still have not answered the question. I will put it another way, one more time, and then we will move on. You are a very qualified economist. I know that you have not examined the modelling that the Bank of England uses or employs, but you must have a view, given that you are soon going to be, one hopes, joining the MPC, on whether the Bank of England is correct to be increasing interest rates at a time when it is predicting a significant fall in inflation and given the lag effect of rising interest rates.

The reason why I am suggesting this to you, and why it is important, is that we are going through, as we all know, a cost of living crisis at the moment, and interest rate decisions are very important to ordinary people out there who are struggling. They affect everything from mortgage rates to bank loans, to spending patterns and wage negotiations.

I am not pointing just to the Bank of England—central banks in general are missing the point here—but there is a lot of pain out there. You are joining the MPC, or hoping to. I am asking you, as an economist, not as an insider to the Bank of England, whether the Bank of England has got it right on interest rates when they are predicting a significant fall, and yet they are still raising them.

Megan Greene: On the basis that they revised their inflation forecast up in the May MPR, and also decided to hike rates, I think that was the right decision.

Mr Baron: Thank you. We got an answer.

Q41            Emma Hardy: Good morning. I want to pick into what you had just got into about the de-anchoring of inflation and expectations, so I am going to ask a little bit more about that. In your questionnaire, you said, “In the 1970s and 1980s, a fragmenting geopolitical environment resulted in an OPEC-generated oil shock. Major central banks failed to anchor inflation expectations, and so inflation remained persistently high for years. If faced with frequent supply shocks, the MPC must learn from this historical period and pursue its primary mandate of price stability”.

That warning feels quite pointed, given what we are facing at the moment, so are you concerned that the MPC might have forgotten those lessons from the 1970s and 1980s?

Megan Greene: No, that is not what I am insinuating at all. The Bank of England has got that lesson, just as every major central bank has. That has really been hammered home.

What changes is this notion that we might be entering an era when we have successive supply shocks, partly off the back of geoeconomic fragmentation and partly off the back of higher geopolitical risk. That is the new piece. I do not think that the lesson is new, but how central banks have to think about their forecasting in the face of these successive supply shocks may need to evolve.

Q42            Emma Hardy: Are we close to having frequent supply shocks, or are you expecting that to be more regular, if we can call a shock something regular?

Megan Greene: It is a risk. As I said, when you are forecasting, you have to build in the balance of risks, and this one needs to be considered as well.

Q43            Emma Hardy: Just going back to your point about inflation becoming de-anchored, how anchored are inflation expectations in the UK currently?

Megan Greene: They are pretty well anchored. If you look at both market-based expectations over five and 10 years, and at survey-based expectations, they are a bit above 2%, but they often have been historically. On that front, inflation expectations remain anchored. That is the case for the UK as well as for the US and the eurozone.

Q44            Emma Hardy: You mentioned to John that there is a risk in them becoming de-anchored. Could you expand on that? What are the possible risks if that happens? How could those risks possibly be prevented by the MPC’s actions?

Megan Greene: There is a risk of them being de-anchored, in that we have had persistently high inflation in the UK and other developed economies for a while now. In normal times, when inflation is around the target, people do not really think about inflation, but people really feel inflation now, and so it is a consideration. The risk is that people just start assuming that inflation will always be like this and, in doing that, end up pulling their consumption forward. They might as well buy a big item now, because it will be more expensive later, which, in and of itself, generates more inflation, because it generates more demand up front. That is the risk.

What you have to do to monitor that is to look at many different metrics for inflation expectations. What the Bank of England can do about that is to be very clear in the primacy of inflation in its remit, and also to highlight exactly what about inflation they are worried about and exactly why their policy decisions are designed to address those drivers.

Q45            Emma Hardy: You were talking to the Chair earlier on about your personal skills as a communicator. What could you bring in terms of communicating this message around inflation? Can we use anecdotes in here? I guess we can. It feels that everyone is expecting inflation to continue at a similar rate, so what could you bring to communicate that and then stop the possible de-anchoring?

Megan Greene: It is in things like speeches, but also more digestible speeches, and speaking directly to what the MPC is doing and exactly why it is doing it, in plain English. Using different kinds of media is potentially a way to reach different audiences. Again, the Bank of England is pretty thoughtful about this. They have a really layered communication strategy which I, as probably the only economist who does not like charts, really appreciate. People digest things in different ways, and so speaking to a lot of those different ways could help the general public to understand what the Bank of England is trying to do about inflation and what its thinking is behind it.

Q46            Emma Hardy: What would be a major sign of de-anchoring? What would you be looking for in terms of, “There is a problem here”?

Megan Greene: I would be looking at all the metrics for inflation expectations, none of which are perfect, but together they provide a picture.

I would also be looking at some of the bottom-up surveys that the Bank of England has from the Decision Maker Panel, for example, on what they expect about their own pricing going forward. That would be an indicator for how inflation might evolve, which could feed through into people’s inflation expectations. Again, it would be useful to speak with the agents, who have really granular intelligence that they feed back up through into the MPC in terms of understanding how companies and individuals in regions are thinking about pricing and inflation.

Q47            Emma Hardy: You mentioned bottom-up surveys and some of the things that the Bank of England currently does, but are you going to bring any new thinking or new suggestions as to what else could be done to communicate what people are thinking? My understanding, from what you have said, is that this de-anchoring of inflation expectation will come from the public. Therefore, it is important to know what the public are thinking.

Megan Greene: In my capacity as a private sector economist, I spend a lot of time scrutinising data. The agents feed a lot of data, and it would be useful to have an even more granular perspective on the data that they are collecting to see what might be picked out of that. The top-down picture is providing a lot of different signals, and so it is quite useful to have a bottom-up picture to overlay. Doing things like reading income statements, talking to companies about whether they are backfilling jobs or trying to hire and expand, and understanding their behaviour around hiring and pricing would be really useful.

Q48            Dame Angela Eagle: Since you have just mentioned it in your last answer, can I talk about company pricing? It forms part of the macroeconomic effect, or the top-down picture, if you want to put it that way. There is what has been termed “greedflation”, in that there may well be a mispricing or a higher pricing of goods going on now, which is hidden because prices are so volatile and consumers are not used to being able to keep tabs on all the prices and to know when certain corporations or companies are mispricing, not only to rebuild their margins, which is what the Governor talked about when I asked him about this, but to profiteer. To what extent is that effect present in persistently high prices?

Megan Greene: It is not just the Governor who makes this distinction. This is wider in the economics field. There is a distinction between predatory profiteering versus rebuilding margins after a really difficult year last year. In my mind, greedflation would apply to the former rather than the latter. You have asked me how much of that is happening; I would say that it is margin rebuilding.

Q49            Dame Angela Eagle: Why do you think that?

Megan Greene: Off the back of a difficult year last year, and it comes through in some of the survey data.

Q50            Dame Angela Eagle: But they would say that in the surveys, would they not? They would not say to you, “By the way, we are not only rebuilding our margins but we are doubling our profits, because nobody is noticing the prices and we can blame it on international world conditions”. It is not going to come through in your bottom-up processes with the agents. Where are you getting your view that greedflation is not happening but that profit margin rebuilding is?

Megan Greene: There are differences in sectors. If you look at the sectors that have fuelled inflation the most, food comes to mind in the UK. There is quite a global component to food inflation, so it has hit the UK, the US and the eurozone in roughly the same magnitudes. Either everybody is engaging in predatory profiteering or it is quite possible that it is rebuilding margins.

If you look at the data, there are some reasons to suggest that corporate pricing power is a factor in inflation. For example, particularly with food, if you look at producer price inflation versus consumer price inflation, they are diverging.

Dame Angela Eagle: Yes, exactly.

Megan Greene: That suggests that some of the pass-through for more expensive inputs is being passed on to the end consumer.

Q51            Dame Angela Eagle: Tesco’s margins, for example, are double what they were before the lockdown, at 4%, which is very high for that sector. Is doubling your profit margins not greedflation? That is not profit margin rebuilding, is it? It is profiteering.

Megan Greene: It really depends on the industry. You need more granular data to really tease that out. We know from some of the surveys that a majority of companies are changing their pricing related to events rather than on a schedule, which suggests that the pass-through that I mentioned, and the divergence between PPI and CPI, is probably going faster now.

Also, if you look at the GDP deflater and try to parse it into wages versus profits—

Q52            Dame Angela Eagle: Wages are down massively in real terms, are they not?

Megan Greene: In real terms, absolutely, in the UK and elsewhere. That is right, but wage growth is still pretty robust in nominal terms.

Q53            Dame Angela Eagle: In nominal terms, it might be robust, but not in real terms, which is what matters to my constituents who are trying to see if they can afford their food shop. According to a recent survey, 38% of my constituents have missed a meal because they cannot afford food, so “nominal” does not mean much. It is the real value of wages that affects whether they are the ones who are going to suffer and pay for this crisis. Then, when you look at the profit margins in the food industry, they are double what they were before the lockdown. Explain that, if greedflation and profiteering is not a part of it.

Megan Greene: If I could just finish my point, teasing apart the GDP deflator is not a perfect method. It requires a lot of assumptions, but it also suggests that there is corporate pricing power.

The problem is that, if you have second-round effects from corporate pricing power on the way up, the hope is that they will fade on the way down as well, but there are reasons to worry that it might be stickier. If companies can rebuild their margins, they will.

Dame Angela Eagle: Rebuild their margins, plus.

Megan Greene: Given the remit of the Bank of England, which is 2% inflation, if this is one of the drivers, there is reason to build that risk into forecasting and to think that, on the way down, it might be a bit stickier.

Q54            Dame Angela Eagle: The Bank of England does not talk to and lecture corporations about not rebuilding but doubling their profit margins or greedflation, but it does lecture workers about trying to maintain the real rather nominal value of their wages. Is that right?

Megan Greene: It is the remit of another authority—probably the Competition and Markets Authority—to address corporate pricing power. That is outside of the MPC’s remit.

Q55            Dame Angela Eagle: I am sorry, but it is not outside of the MPC’s remit. If interest rates have to go up because there is profiteering going on, inflation remains higher because prices are higher than they would be if there was proper pass-through. That is directly your remit, surely.

Megan Greene: Both wages and prices are inputs into the Bank of England’s analysis, of course, but it is not the remit of the MPC to determine how companies set pricesor wages, for that matter.

Q56            Dame Angela Eagle: Let us look at banks, which, as this Committee has repeatedly pointed out, immediately pass on interest rate rises to their borrowers in a nanosecond, but then, effectively, do not really pass on the benefits at all to their savers. We have seen that there is a huge gap there, which is leading to huge increases in profits for the banks. Are you concerned about that?

Megan Greene: Again, that is an input. This is an issue everywhere. It is an input into the Bank of England’s thinking, but it is not up to the Bank of England to tell commercial banks how to set their deposit rates. That is up to the banks.

Q57            Dame Angela Eagle: So it is up to the Bank of England to tell workers that they should be worse off because they cannot be allowed to claim, in real terms, even to stay with the price increases, but it is not part of the Bank of England’s remit to tell banks how to price the interest rates that your decisions affect. That seems to be a huge gap in your view of what the Bank of England should be doing.

Megan Greene: The Bank of England needs to take these things in as inputs to its own analysis, but it is not in charge of setting any of these things.

Q58            Dame Angela Eagle: The banks are keeping so much of the money that they ought to be giving to savers from rising interest rates, which have risen 12 times so far and look likely to rise further. There are still profits to be made by hitting borrowers straightaway but not rewarding savers.

The whole point of a rise in interest rates is to increase the incentives to save in order to try to damp down economic overactivity, which is why interest rate rises can sometimes lead to recession, but, if the banks are swallowing all the benefit of interest rate rises and not passing them on to their borrowers, does that not mean that the interest rate transmission mechanism—the only lever that the Bank of England has—is not as effective as it should be?

All else being equal, what would have to happen is that interest rates would have to go even higher, because the banks are greedily keeping some of the benefits of interest rate rises for savers that should be passed on to those savers.

Megan Greene: You have delineated a great argument for why the Bank of England needs to consider this as an input in their forecasts and also in their monetary policy stance. It is up to a regulator to address how commercial banks are setting their deposit rates.

Q59            Dame Angela Eagle: So you think it is the FCA’s remit, not the Bank of England’s remit.

Megan Greene: To be honest, I am not sure if it is the FCA or the PRA, but it is somebody else. I do not think that it is the remit of the MPC.

Q60            Dame Angela Eagle: The rate of interest is your one golf club, although we know that QE is an extra little one in there. Are you not worried about whether the effectiveness of the transmission mechanism is being curtailed by the greed of the banks?

Megan Greene: What we are seeing globally—or at least across the developed world—right now in terms of the monetary policy transmission mechanism through the financial markets, and also through the real economy, has surprised a lot of economists, in that it is being transferred through the financial markets, as you would expect. Loan demand is slowing and lending standards are tightening. That is what you would expect.

The real economy is responding differently, and that is due to a lot of successive shocks that we have seen. It differs by jurisdiction. Labour hoarding is a piece of this. The labour market has held up incredibly well in the face of aggressive hikes. There are a number of factors like that that mean that the real economy is not responding to the tightening cycle that we have seen in the UK, the US and the eurozone. What you are highlighting might be a factor, but there are many others as well.

Q61            Dame Angela Eagle: You are not worried that, because the banks are profiteering and not passing on the benefits to their savers, they have so much money that they are launching huge share buybacks, so that, presumably, the executives can pay themselves for their own success even more. That creates a society that is even less equal than the one before. You are not worried about that at all. That is not your remit.

Megan Greene: As a member of the MPC, you have to take that as an input in trying to achieve a remit that has price stability as the first and main goal.

Q62            Dame Angela Eagle: In future, might you on the Monetary Policy Committee not lecture workers as much about trying to maintain their living standards, and perhaps lecture those who earn their money through huge dividends that are artificially inflated by the profiteering that the banks are doing by not passing on the benefits of interest rate rises to their savers? Might you lecture them about that?

Megan Greene: I do not aim to lecture anyone as a member of the MPC. In the environment that we are in, inflation hurts everyone. It hurts the lower parts of the distribution the most, which is why the Bank of England really needs to focus on getting inflation back to its target. I hope that lecturing does not come into it.

Dame Angela Eagle: Have a word with the Governor.

Q63            Dame Andrea Leadsom: I am really interested in what Dame Angela was saying and your response to it. Just to ask it in a slightly different way, since it is the independent members of the Monetary Policy Committee who make the big speeches and who are very influential, is it not entirely valid to say that, on the one hand, in order to get back to 2% inflation, you need to see modest wage claims, no profiteering from the food providers, and banks being equal and fair to savers and borrowers? Is that not a reasonable thing to put out? It is not so much lecturing, but merely pointing out the consequences, as an independent member of the policy committee, of people’s failure to play the game properly.

Megan Greene: It is not the job of an MPC member to go out and try to set the rules of the game for how the economy is run.

Q64            Dame Andrea Leadsom: I do not mean the rules, but simply setting out the factors. What we are trying to get at, as Dame Angela has said, is that it is the case that members of the MPC have said that we need wage restraint. What they are then saying, and what you are saying, is, “No, savings rates are a factor for either the FCA or the PRA, not us, and profiteering from food is a matter for the Competition and Markets Authority”. What is the role of the MPC? Is it nothing or is it something—to set out the playing field but not to lecture?

Megan Greene: It is not to set up the rules of the game. That is a role for the Government and the appropriate regulatory authorities. The role of the MPC is to try to get inflation to 2% and, over the medium term, to keep it there. Therefore, of course, it has to engage with these issues and consider them as an input, but it is not up to the MPC to set up the structure of an economy.

Q65            Dame Andrea Leadsom: Turning to one of the more recent tools of the MPC, which is quantitative easing, now quantitative tightening, what is your overarching view of the effectiveness of QT and the potential for it to be a tightening in the economy as much as an unwinding of QE? Is it a tool or is it not?

Megan Greene: It is not the main tool for any central bank, partly because we do not have much experience with the balance sheet. We have more experience with expanding it. We have very few samples of shrinking the balance sheet. That is one reason why it is not the primary tool for central banks. Some central banks have suggested that QT will just run in the background and no one will notice, and there has been a hope that it will just be QE in reverse. I do not think that is the case, partly because QE is announced in very different circumstances than QT is. QT happens when you are in a relatively good, stable place in the economy.

I worry that QT does not involve some tightening. Of course, it has some impact. We do not have much experience with this, and so figuring out how much tightening it involves is difficult. The Bank of England has been really forthright in suggesting that the size of the balance sheet, when QT is done, will have to be bigger than it was before we started QE. That is really wise. There is a greater need for reserves in the banking system.

The Bank of England has also been really prudent in terms of when it announces QT. You will remember that, last fall, the Bank of England wanted to start QT but delayed it because of the financial instability that we were experiencing, so it has shown that it is sensitive to market conditions and that the balance sheet is going to have to be bigger in the end than it was at the beginning.

There has been research done by Raghu Rajan and others looking at US bank behaviour under QE and QT, and it suggested that, under QE, banks increase their liquidity needs. Just because the central bank decides to shrink its balance sheet, bank behaviour does not necessarily change back all of a sudden, and so there is a greater liquidity need for banks.

That is something that all central banks need to be mindful of, because it does mean that we are withdrawing liquidity as banks’ liquidity needs are not shrinking. That is based on a sample size of one, in a different country, so a lot more research needs to be done on this, but it is a factor that needs to be considered. In fairness, the Bank of England is considering this, given that it expects the balance sheet to be much higher at the end of this than it was before.

Q66            Dame Andrea Leadsom: Do you think that simply announcing that we are going to do a certain amount every month is the way in which there is no impact to the underlying economy? As you have said yourself, at a time when banks might be requiring more liquidity, if we are taking liquidity out of the economy, that surely has a tightening effect. What do you consider to be the transmission effect of QT?

Megan Greene: I would not say that there is no impact. That is not what I was trying to suggest. By announcing and signposting it in advance on a very reliable schedule, a central bank is allowing markets to price that in pretty up front, so that there are no surprises on that front. There is some tightening effect, but it is an orderly tightening effect, given that it is pre-announced and reviewed regularly. Central banks do not like to impose surprises generally, and this is part of making sure that it is an orderly process.

Q67            Dame Andrea Leadsom: Are you worried about fraud? If you announce that you are coming, the markets see you. Is there a risk of fraud in QT?

Megan Greene: I am not worried about fraud.

Q68            Dame Andrea Leadsom: Why not?

Megan Greene: Why are you worried about fraud?

Q69            Dame Andrea Leadsom: We saw LIBOR rigging. We saw rumours of gilt auction rigging. We now have quantitative tightening, which suggests very clearly, “We will be in the market, participating with a certain amount on a certain date”. Why would you not be worried about fraud?

Megan Greene: QT represents some of the roll-off and, therefore, the supply of Government bills in the market, but only a small part of it. The Government are issuing a lot of debt, which makes sense, so I do not think that QT is where vulnerability lies. There is a lot of debt issuance overall.

Q70            Dame Andrea Leadsom: Do you think that there could become pressure on central bank independence to stop raising interest rates because of the cost of funding public sector debt?

Megan Greene: No. This is why central bank independence is so important, so that central banks are free to do what they need to do in order to achieve the remit, regardless of what the Government are doing on the fiscal side.

Q71            Dame Andrea Leadsom: So you think that the central bank will always resist Government pressure.

Megan Greene: Most major central banks will be sensitive to any infringement on their independence.

Q72            Mr Baron: I just have a quick follow-up, if I may, on quantitative tightening. I welcome your caution about quantitative tightening. There is a big debate at the moment around the extent to which QE contributed to inflation and that second phase. I know that the Bank denies this, but certainly I think that there was a big jump in inflation, in part because of that. Evidence of that is that, as Professor Tim Congdon has said, if you look at China or at other countries, including Japan, which did not have that second phase of QE, there was less inflation, if any at all.

On QT, as one who believes that inflation is going to be stickier and more volatile than consensus forecasts have us believe, let us just say for one moment that the Bank of England and the OBR are right and that we are going to see a significant fall in inflation. Is there not a danger of overkill here? You have interest rates going up at a time when the lag effect would suggest, if you are confident about your end-of-year inflation forecast, that they should not be going up. We now have QT that, you accept, is a bit of a leap in the dark, and we have a Chancellor who has said that he is comfortable about going into recession to cut inflation and stabilise the economy. There could be overreaction by the authorities here, could there not, in causing a severe economic slowdown? What do you think are the chances of that happening?

Megan Greene: There is always a risk of overtightening. Given the lags in monetary policy transmitting through to the real economy, that is always a risk that the Bank of England is highly aware of. The calculus that every central bank has to do is to figure out whether that is the greatest risk versus not tightening more.

Q73            Mr Baron: Are you talking about quantitative tightening here? When you say “tightening”, are you talking about QT?

Megan Greene: No. I was addressing your broader question.

Q74            Mr Baron: Can you just bring it back to QT? There is so little known about it and it is a leap into the dark. There is a big debate now as to whether QE contributed to inflation. The Bank of England would say that it did not, but some of us think differently. Is QT not a leap into the dark that you have to treat very carefully, given that you are increasing interest rates and that we have a view that perhaps recession is the price worth paying to get inflation under control?

Megan Greene: I would agree that QE probably is not the major driver of inflation that we have seen, and there is a lot of evidence to bear on that. That said, QT does represent some tightening. That is also why the Bank of England has been incredibly clear about the increments.

Q75            Mr Baron: If you do not think that QE has been inflationary, why do you think QT should be disinflationary?

Megan Greene: On the margin, it represents some tightening. It is not the main policy tool. It is not like QE did not contribute at all to inflation. There are just other factors that probably contributed more. I am not saying that QE and QT did nothing, by any stretch of the imagination. On the margin, QT represents some tightening. The Bank of England has set out its schedule for QT in advance so that markets can price that in immediately and, hopefully, the tightening can be managed.

I also think that the Bank is managing that risk by making sure that there are enough reserves in the system at the end of QT, rather than trying to shrink the balance sheet to where it was before QE started.

Q76            Rushanara Ali: I just had a couple of follow-up questions to the earlier ones about wage restraint and so on. The Governor of the Bank of England said around 4 February that workers and employers should show restraint in the bargaining process. Huw Pill had to apologise for using inflammatory language about people needing to stop asking for pay rises in order to keep up with soaring prices, which is quite logical. If they were paid the poor wages that people have had to be paid, with a decade of wage freezes, I suspect that the Bank of England Governor and his chief exec would be feeling similarly aggrieved and want to see their pay increased.

Do you think that there are double standards in the way that workers are being told to do one thing when that it is not being replicated, as others have said, in terms of narrative and what is said to banks? Is there a risk that the Governor and some others—in this case, Mr Pill—are not being even-handed in the way that they are communicating to the country?

Megan Greene: They were communicating the distributive consequences of inflation, which most economists agree with. Unfortunately, the other part of the message may not have been conveyed, which is that inflation really hurts everyone. It is a terrible problem.

Q77            Rushanara Ali: They have said that to us but, to my knowledge, what they have not done is taken action to get banks to pass on interest rate increases to savers. We have not seen results. If they do not see it within their remit to ensure that that happens, they ought to be speaking to those who have the remit to make sure that that happens, because these are financial services. What is your view on that?

Megan Greene: They are incorporating this into their analysis. As has been pointed out, the main tool for the MPC is the interest rate, and so I do think that they are using the interest rates.

Q78            Rushanara Ali: I get that about analysis but, if they are interfering by commenting on workers and what they should demand, should they not be interfering in terms of telling financial services, “You need to act and we need to see results”? This Committee has raised these issues multiple times, but we are not seeing the passing of saving rates on to savers.

The point was made by our two esteemed Dames earlier about the cost of food, and rackets. During the pandemic, we saw some of this. We raised it with the Competition and Markets Authority and some of it was dealt with.

There is a bigger point in terms of the impact. Your key lever is interest rates, but these other things are shaping what happens next. There does not seem to be proactive action to deal with these other business interests, whether it is financial services or retailers, by key people in the Bank, while they are quite happy to tell workers to show restraint or to tell the British people to learn to live to be poorer.

The way they are approaching it seems lopsided and completely unjust. Either they should say nothing about these issues and not make comments, or they should be even-handed. It looks like they are being captured by certain vested interests. What do you think? Are you prepared to be more even-handed and challenge those institutions that are, frankly, adding to peoples misery in this country?

Megan Greene: Yes, this all needs to be considered in the inflation picture and dealt with by the MPC according to how it is influencing inflation. The primacy of the MPCs remit is inflation. These things are terrible and need to be considered, but it is not part of the MPCs remit, as I have said a few times.

Q79            Rushanara Ali: There are members of the MPC who are making comments. The Bank of England Governor is a member of the MPC, with respect. Should he be saying these things? Will you be in a position to speak truth to power and say, “Hang on a minute, Governor and members of the MPC. If you are going to say this, you need to say that. You need to make sure you are even-handed”?

Can we be confident that you are going to be robust with those people? I cannot speak for other colleagues, but I have heard two or three others who share those views. It does not seem very even-handed, and it is riling the British people when they are really struggling. That is not okay. We have seen form in the past with some of these behaviours. Are you prepared to do that?

Megan Greene: I agree that people are really struggling. That is a huge problem. The MPC and other policymakers need to be sensitive to that and consider that. As I said before, I am writing a book on inequality rights. Inflation is an incredibly regressive tax, effectively. It hits poorer people the hardest. It is really important to be sensitive to that in communications, but we also need to incorporate that in terms of how it affects greater output. Consequently, inflation is key to what the Bank of England needs to do in trying to achieve its 2% target.

Q80            Rushanara Ali: These are things that other people have done, but I just want to know that you are going to be speaking robustly and pointing out that we cannot have these one-sided comments. Either say nothing or say things that make a difference in terms of both sides of the equation, in terms of consumers and workers as well as banks that are falling short and so on.

Megan Greene: Just to clarify, it is really important that the Bank of England engages with these issues and incorporates them into analysis and forecasts. That is key.

Q81            Rushanara Ali: It is doing more than that. On the one hand we often have people from the Bank saying, “We cannot get engaged in policy. We cannot engage in such-and-such. That is not in our remit,but they are quite happy to engage in lecturing people about wage restraint and learning to live to be poorer, while, of course, certain groups, including particular banks, as you have heard, continue.

The Bank has a remit to speak out and to show some leadership. If it is going to show leadership on wage restraint—we get that wage increases have implications for the economy—they ought to be doing that in an even-handed way. That is not what is happening.

Megan Greene: I am not going to lecture anyone.

Q82            Rushanara Ali: That is fine. I am going to go on to other questions. In your questionnaire, you said the three main risks to the UK outlook were financial instability, labour hoarding and geopolitical tensions. Which one of the three poses the main risk to the UK economy?

Megan Greene: Financial instability poses the main risk not just to the UK economy but broadly. Major central banks globally are in a rate-tightening cycle while shrinking balance sheets. Other central banks are offsetting that. Namely, the Bank of Japan has been pursuing yield curve control. It continues to expand its balance sheet to offset global liquidity, but that might not continue over the next year.

We need to go slowly and quite deliberately in terms of quantitative tightening to avoid a repeat of the repo rate spike in the fall of 2019 in the US, for example. It is not just a risk in the banking sector. There is also a risk in the non-banking sector, into which we have much less visibility.

Q83            Rushanara Ali: In your questionnaire, you noted that by the end of the MPCs forecast period, you expect GDP growth will accelerate as potential growth wanes and so the output gap should increase. Could you explain this and what it would mean for inflation?

Megan Greene: Yes. The Bank of England put out its supply side analysis of the economy back in February. Since then there has been new data on immigration in particular, which might shift that analysis a bit. Generally, potential growth in the UK has waned and should continue to wane.

The investment outlook, which has been fairly weak, should probably drag on potential growth as well. At the same time, I see real outputs probably accelerating over the medium-term forecast. That means that, if you end up having actual output above 1%, let us say, inflationary pressure should build. That is where the MPC needs to look into it.

Q84            Rushanara Ali: Turning to global comparisons, different countries have different issues, but the common issues are Covid, the Ukraine conflict and so on. To what extent has the UK faced added risks to financial stability or risks to the economy because of the 4% hit on GDP due to Brexit, the Liz Truss/Kwasi Kwarteng mini-Budget fiasco and the fact there was self-inflicted damage to our economy and economic stability?

Megan Greene: I will start with the latter just because, if you look at the financial markets indicators of stress, most of the response to the mini-Budget has fallen out of the data. There will not be significant longstanding implications from that.

On the other hand, Brexit represents a structural shock that the UK faces that other countries do not face. If you look at the data we have, there has been a trade shock, given that the relationship with the UKs biggest trade partners has changed. There has also been a hit to investment that might drag on potential growth going forward. As an appointed member of the MPC, my interest is in the medium-term outlook. We see that in the data and we can expect it to continue.

We cannot guess what new trade relationships might emerge or what might happen on the regulation front. That is beyond the forecast period, but over the next couple of years Brexit might contribute, along with other factors that have increased uncertainty that most major economies have faced, to lower productivity growth and potential growth.

Q85            Rushanara Ali: The economic shock of the Truss/Kwarteng Budget did lead to impacts on mortgage rates. The numbers are pretty damning in terms of the mortgage premium on people and the response then by the new Chancellor in terms of consolidation and so on. The combination of public spending cuts and tax rises totalled £55 billion. It has had a real effect, albeit not in the way you have described it.

Megan Greene: There may be fiscal effects, which are not really my lane, but I am looking at the risk premium that is built into borrowing costs for the UK, which could be fundamentally higher and they are not. That is what I am saying. That has fallen out of market pricing.

Q86            Rushanara Ali: I have one final thing on green financing. There was a bit of press attention at the weekend in the Telegraph in response to the idea of dual interest rates. I understand the thinking behind it. The President of the European Central Bank, Christine Lagarde, acknowledged the link between reliance on mostly imported fossil fuels for energy needs and the current high inflation. If we want to head towards net zero, we need to think through how to do that in that context.

Could you explain to us what you mean by having dual interest rates and what that would mean if it were proposed or considered by the Bank of England for the Bank of England? We have made great strides. A few years ago, when I joined this Committee, it seemed a far cry that the Bank would have any remit to do with climate and green finance. That has changed. Where do you see this idea of dual interest rates going? What are your thoughts on that?

Megan Greene: Again, it is not up to an MPC member to set the remit. If it were set as part of the remit, the way dual interest rates would work is not that different from the Funding for Lending Scheme term-lending programme the UK has already implemented. It is just that the conditionality around it would be different. Effectively, there is the policy rate, but then there is a different rate for banks borrowing from the central bank if they lend on for something. We saw this in the UK. We have also seen it in the ECB with TLTROs.

Rushanara Ali: We have seen it in Japan.

Megan Greene: We have seen it in Japan, and we have seen it in Israel now as well. Notably, the ECB is particularly different because they separated the interest rate. They cut the interest rate at which banks could borrow from the central bank, if they generated new lending. Effectively, it was encouraging banks to lend to the real economy at a time when demand was really depressed. You could set this up and, instead of the stipulation being new lending into the real economy, it could be green investments.

There are questions about who determines what is green or not. Taxonomy is always an issue when it comes to the green transition. That is a question. There is a question about who gets to decide whether this happens or not, which we have already discussed as well. There is also a slippery slope argument. Now the Government want a green transition. Next, they might want funding for something else the central bank does not agree with. There is a slippery slope.

It is not a silver bullet. In fact, I would not even put it up as the best option. If we are trying to mobilise private capital for the green transition, this is one way you could do it. Central banks do not want to make decisions about asset allocation. That is really up to elected authorities. Again, this is not the best option, but it is certainly an option, if it is baked into the remit.

Q87            Chair: There are a couple of last questions from me, if I may. On 24 June 2016, you said Brexit was the most damaging blow ever inflicted on the liberal democratic international order. You have downplayed that today to be an economic shock. Was that slightly over the top?

Megan Greene: My interest in Brexit is in terms of the impact on the economy. As I mentioned, there has been an impact in terms of

Q88            Chair: “Most damaging blow inflicted on the liberal democratic international order” sounds a bit hyperbolic to me.

Megan Greene: Yes, we need to define the liberal democratic international order.

Q89            Chair: This was you tweeting it.

Megan Greene: Yes, that is fine. I just think in order to understand—

Q90            Chair: Do you still hold that view today?

Megan Greene: There have been blows to the economy that are

Q91            Chair: That is not what you said in your tweet, though.

Megan Greene: That is what I was saying in my tweet.

Q92            Chair: No, you said it was the most damaging blow ever inflicted on the liberal democratic international order.

Megan Greene: If you consider that the liberal democratic international order has at its heart free trade, Brexit represents a step away from that in terms of new trade relationships with different trading partners.

Q93            Chair: Do you still believe that to be the case?

Megan Greene: I am just saying that Brexit probably is an economic shock.

Q94            Chair: You do not agree with what you said in 2016 anymore.

Megan Greene: Brexit has been a headwind for the UK economy. That plays out in the data.

Q95            Chair: Has it been the most damaging blow ever inflicted on the liberal democratic international order?

Megan Greene: In the context of a nearby war, there are different shocks.

Chair: Yes, quite.

Megan Greene: Brexit has been a headwind for growth.

Q96            Chair: That is a different thing to say.

You are replacing Silvana Tenreyro on the committee, and she has been a notable dove on the committee. Do you want to say anything about whether you would have been aligned with her? Would you have been taking different decisions? Is that too much hindsight for you?

Megan Greene: Yes, I would like to be part of the discussions around inflation and rates at the Bank, and to have access to the models and the granular data from surveys, before I can determine where I might sit relative to a colleague.

Q97            Chair: Looking back on the public statements she has made, have you ever felt that you had a very different view at the time?

Megan Greene: She has access to very different resources than I do. It is not really a fair comparison.

Q98            Mr Baron: Very quickly, the reputation of forecasting has taken a big hit generally. The IMF is talking about the UK being in recession one minute, and the next we are not going to be. That is one small example. We have seen the forecasts from the Bank of England and other central banks prove not to be correct.

You have highlighted the impact of Brexit. Would you accept that there is no shortage of people on both sides of the equation who pluck obscure figures out of the ether in order to justify their position? One of the litmus tests of how well an economy is doing is the unemployment rate. That cannot be denied. It is what is happening now. Anybody can pluck out these various predictions, which invariably do not prove correct.

Can I just take your view on that? The UK unemployment rate is nearly half that of the EU. Growth seems to be picking up, according to the international bodies, including the IMF, which previously predicted a recession. It is not half as bad as the pessimists about Brexit have made out, is it, including yourself, particularly that comment you made back in 2016? At the end of the day, the litmus test is unemployment, is it not? It has to be one of the key litmus tests of how well an economy is doing.

Megan Greene: Labour market data is very useful, in that it comes out regularly and the unemployment rate is never really revised. You have the data. Some of the monthly jobs data is revised, but generally the unemployment rate is not. It is also the best indicator we have for a recession, if there is an increase in the unemployment rate over a certain period of time. That is better than any economist or yield curve.

It is important data, but it only gives insight into a pocket of the economy. It would be wrong to focus only on the labour market data. You need to overlay it with everything else that is coming in.

Mr Baron: It is real.

Q99            Dame Angela Eagle: Can I just ask a question, given that we have come on to this subject? The OBR costed Brexit at 4% of GDP. Is a shock of 4% something most developed economies would willingly inflict on themselves?

Mr Baron: That is according to the OBR. They are useless.

Megan Greene: If we take that forecast, what economy would raise their hand for any shock of GDP? None, unless the economy were massively overheating. Economic growth heals most wounds. Unless the economy is overheating, no policymaker would aim to reduce GDP growth.

Chair: We have covered a wide range of topics with you, and we will no doubt see you regularly in front of us in future. I am going to draw the formal session to a close. That concludes the Treasury Committee evidence session.