Anger over MPC member’s call for Bank to create special rates for green investment

Jeremy Hunt’s nominee to join the Bank of England’s rate-setting panel has called for the bank to create “preferential” interest rates to help speed up the push for net zero, despite acknowledging that such a move could threaten its independence.

In an article published before her nomination, Megan Greene warned that central banks needed to “go further” to help combat climate change and said that the BoE should introduce a system of “dual interest rates” to  “give banks preferential (negative) rates if they direct the funds toward green investments”.

The remarks sparked alarm among senior Conservatives and government sources.

Welcoming her nomination in April, Andrew Bailey, the Bank of England’s governor, said: “We will benefit greatly from her contributions to our policy discussions.”

Lord Frost, the former Cabinet minister said the UK would be “deranged” to adopt Ms Greene’s idea, adding: “It is deeply troubling that a prospective member of the Monetary Policy Committee should have advocated such a collectivist and socialist approach.”

‘Extraordinary departure from Bank’s policy’

A government source questioned why Ms Greene had been nominated by Mr Hunt given these views. The source stated: “This would be an extraordinary departure from the Bank of England’s policy of regarding interest rates as neutral and would be an explicit favouring of one section of the economy over the other. It is surprising that this nomination has been made.”

In the article, Ms Greene acknowledged that ministers would not “want unelected central bankers to make decisions about how to allocate resources in the economy” and that central banks taking such an approach “could ultimately threaten their independence”.

But she insisted that such a system of preferential interest rates for green investments “may be the only feasible response to climate change”.

The disclosure comes ahead of a Commons hearing on Tuesday in which Ms Greene will be questioned by the Treasury committee about her suitability to join the nine-strong MPC as an external member, sitting alongside Andrew Bailey, the Bank’s governor and three deputy governors.

The article is likely to spark further questions among Conservative MPs about whether Ms Greene should be given a place on the committee, which decides on the operation of monetary policy, voting eight times a year on whether to adjust interest rates in response to inflation.

Ms Greene, the global chief of American risk management firm Kroll, is due to replace Silvana Tenreyro when her term ends in July.

In October last year she criticised Liz Truss’s government and its economic policies, saying “there has been a lot of economic mismanagement”. In 2017 she told Bloomberg that “Brexit is bad for the UK economically”.

Her call for the BoE to provide “preferential” interest rates for “green investments” was set out in an article published on the Project Syndicate website on September 12 2022.

‘Inaction is not an option’

In the article, Ms Greene said that central banks in the US and Europe should “use their supervisory and monetary-policy tools to catalyse and incentivise the transition to a carbon-neutral economy”. “Inaction is not an option.”

She added:  “By subsidising cleaner alternatives to dirty energy, central banks can both contain inflation and support growth.

“One way to do this is by using dual interest rates to incentivise private-sector green lending. Both the BOE and the ECB [European Central Bank] have already explored this option in response to the pandemic. The BOE has redeployed the Funding for Lending Scheme to support the UK economy ... But rather than just targeting central banks’ lending to the private sector, these schemes should be used to give banks preferential (negative) rates if they direct the funds toward green investments.

“Obviously, such proposals raise political questions. Elected officials do not want unelected central bankers to make decisions about how to allocate resources in the economy. Most central bankers do not want that responsibility, either, because they know that it could ultimately threaten their independence.

“But even if dual interest rates aren’t an ideal response to climate change, they may be the only feasible one. If politicians were capable of mobilising private capital for the green transition, they would have done it by now.”

Lord Frost said: “The suggestion of lower interest rates for “green” projects does at least acknowledge that such projects are not viable on normal terms, something which their proponents are usually reluctant to recognise.  So if implemented this proposal would take us a further step away from normal market economics, with the Government instead allocating investment capital to its favoured clients and projects.

Announcing Ms Greene’s nomination in April, Mr Hunt said: “Megan Greene’s wide experience across financial markets and the real economy will bring valuable new expertise to the MPC. I am delighted to appoint her to this role and look forward to seeing her contribution to policymaking in the coming years.”

The Treasury declined to comment.