BOE Must Be Patient In Considering Response To Middle East War, Says Breeden — 2nd Update
The Bank of England should avoid rushing into policy changes in response to the Middle East conflict, Deputy Governor Sarah Breeden said Thursday, while emphasizing the need to stay alert for any renewed acceleration in wage growth that could reignite inflation.
The central bank kept its key interest rate unchanged last week and reiterated it stands ready to act if the recent spike in energy prices threatens to entrench inflation. Even so, Breeden urged patience, noting that an overly hasty move could prove counterproductive if growth weakens and inflation drifts below target in the years ahead.
She said policymakers should wait for clearer evidence before adjusting rates, stressing the balance of risks: second-round effects from higher energy costs must be watched closely, but there are also risks on the downside for activity and inflation.
Fresh projections from the Organization for Economic Cooperation and Development underscored the potential impact on the U.K. economy. Among 20 major economies assessed, the U.K. saw the largest downgrade to its 2026 outlook, with growth now projected at 0.7%, down from 1.2% in December. At the same time, the U.K. registered one of the biggest upward revisions to inflation for this year, with prices now expected to rise by 4%, compared with a prior estimate of 2.5%.
Breeden said policymakers should have “a chunk more” information by the next rate-setting meeting on April 30, helping them judge whether recent energy price moves are feeding through to pay and services inflation or instead acting mainly as a drag on household spending and growth.
Market pricing after last week’s communications points to two or three quarter-point rate increases this year. Breeden cautioned against drawing a straight line from oil and gas prices to the path of Bank Rate, arguing that the appropriate response depends on the broader economic context—how households, firms, and wages react to the shock.
European central bankers learned hard lessons from the 2022 surge in energy and food costs following Russia’s full-scale invasion of Ukraine. That episode lifted wage demands and pushed up prices for labor-intensive services, keeping inflation above target for longer than expected.
According to Breeden, today’s backdrop is different: higher borrowing costs are already restraining activity, inflation has fallen from its peaks, and there is more slack emerging in the labor market. The economy was “lackluster” even before the latest geopolitical tensions, she noted. In such conditions, workers may feel they have less bargaining power to demand large pay rises, and businesses may be less confident they can pass through cost increases without losing customers—making second-round effects less likely.
There is, however, a key distinction from 2022. Back then, households were coming off a long stretch of low inflation. Now, after a period of elevated prices, they might react more quickly to another energy shock by pushing for higher wages. That possibility, Breeden said, requires vigilance from policymakers to ensure any renewed pay momentum does not embed higher inflation.
The bottom line: the Monetary Policy Committee remains data-dependent. Patience is warranted while the outlook clarifies, but the BOE will move if evidence emerges that energy costs are feeding through to wages and services prices in a way that threatens to keep inflation persistently above target.
