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BOE · Geopolitics · Inflation · Interest Rates
Deputy Governor Sarah Breeden stated on Thursday that the Bank of England should exercise patience in its response to the Middle East conflict, despite rising energy prices, while remaining vigilant for potential wage inflation, as the central bank left its key rate unchanged last week.
Breeden emphasized that acting without sufficient information is unwise, acknowledging risks on both sides, including the possibility of inflation falling below target if economic growth is significantly impacted. Investors currently anticipate two to three quarter-point rate increases from the BOE this year, following the central bank's recent comments.
However, Breeden clarified that the path for rates remains open, asserting that a direct correlation between oil and gas prices and the Bank Rate is not guaranteed, as it heavily depends on the shock's context. She contrasted the current situation with the 2022 Ukraine invasion, noting that borrowing rates are now restraining activity, inflation is lower, and the job market exhibits more slack, with a "lackluster" economic outlook pre-war.
These factors suggest "second round effects" of inflation are less probable. Nevertheless, Breeden highlighted a crucial difference: British households, having recently experienced prolonged high inflation, might demand higher wages more quickly in response to surging energy prices, necessitating continued vigilance from policymakers, as reported by Paul Hannon for Dow Jones.
