BoE's Greene Says Waiting on Iran War Is Better Than Rushing Rate Hikes

Bank of England rate-setter Megan Greene delivered a clear message on Monday: the Iran conflict has flipped UK inflation risks entirely to the upside, and the Monetary Policy Committee should wait before deciding whether to raise interest rates again. Speaking in a Bloomberg podcast, Greene said it is worth waiting "a little while" to see how the war propagates through the economy, because the energy shock is a negative supply event that can lift inflation and weaken growth at the same time.

That explicit call for patience immediately complicates the near-term rate path for sterling. The simple market read is that a dovish-leaning MPC member is pushing back against further tightening, which would normally weigh on the pound. But the better read is that Greene is describing a stagflationary impulse that traps the BoE in a policy dilemma with no clean exit, and that uncertainty is what will drive GBP price action over the coming weeks.

The Simple Read: Delayed Hikes, Weaker Sterling

The headline takeaway is that one of the BoE's external members sees more risk in acting too quickly than in waiting. If that view gains traction, the implied probability of a November or December rate hike will fall, narrowing the rate differential that has supported GBP/USD above 1.20. Short-term sterling traders may sell the pound on the assumption that the BoE is now more likely to pause.

But that interpretation misses the mechanism Greene actually described. She did not argue that inflation is under control; she warned that progress on inflation was already slowing before the Iran escalation, and that the new energy shock has shifted risks "entirely on the upside." That is not a dovish signal. It is a warning that the next move in rates could still be higher, just not yet.

The Better Read: Stagflationary Shock Traps the BoE

Greene called the current environment "a terrible situation for a central banker to be in" because a negative supply shock forces a trade-off between fighting inflation and supporting growth. Higher energy costs push up headline and core inflation through transport, manufacturing, and second-round effects, while simultaneously squeezing real incomes and aggregate demand. The BoE cannot easily hike into a weakening economy, but it also cannot ignore an inflation impulse that is already proving sticky.

This is the classic stagflation setup that bedevilled the Bank of England in the 1970s and early 1980s. The difference now is that the labour market, while looser than a year ago, is still tight enough to generate wage pressures. Greene acknowledged that a weaker economy and looser labour market should help contain second-round effects, but the risk is that the energy shock reignites inflation expectations before the growth slowdown fully materialises.

For sterling, this means the rate path is no longer a simple function of how many hikes are left. It is a function of how the BoE navigates a supply-side shock that could force it to keep rates higher for longer even if it pauses. That shifts the focus from the terminal rate to the duration of restrictive policy, and it introduces a volatility premium into GBP pairs.

GBP/USD and the Oil-Dollar Channel

The Iran conflict does not only affect the UK through energy costs. It also strengthens the dollar side of the GBP/USD equation. Oil prices have surged on the threat of supply disruptions, and the US is a net energy exporter while the UK is a net importer. That divergence in terms of trade tends to widen the growth and current-account gap between the two economies, favouring the dollar over the pound.

When oil spikes, the dollar often rallies on safe-haven flows and the improved US trade balance. The pound, by contrast, suffers from the deterioration in the UK's external position and the hit to domestic demand. This channel was visible during the 2022 energy crisis, when GBP/USD fell below 1.04, and it is re-emerging now. Even if the BoE keeps rates on hold, the pound can weaken if the dollar strengthens on geopolitical risk and higher oil.

Traders should watch the correlation between Brent crude and GBP/USD. A sustained move above $100 a barrel would likely push the pair toward the lower end of its recent range, regardless of near-term rate expectations. The BoE's dilemma only adds to the downside risk because it limits the central bank's ability to defend the currency with hawkish rhetoric.

The Next Marker for Sterling

Greene's comments set up a data-dependent period where every inflation print and every oil price move will be scrutinised for clues about the BoE's reaction function. The next UK CPI release is the first hard test of whether the energy-driven inflation impulse is already feeding into the data. A hotter-than-expected print would validate Greene's upside risk warning and force markets to reprice the probability of a resumption of hikes later in the year.

For now, the BoE is in wait-and-see mode, but the transmission from the Iran conflict to UK inflation is already underway. Sterling traders should position for a pair that is more sensitive to oil prices and less responsive to traditional rate differentials until the growth-inflation trade-off becomes clearer.