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(Bloomberg) — Bank of England Deputy Governor Sarah Breeden played down the threat of a wage-price feedback loop in response to the Iran War, saying a weak economy means workers and firms have less bargaining power.
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Breeden said on Thursday that second-round effects “should be less likely,” adding that the UK central bank is in a different situation to 2022 when Russia’s invasion of Ukraine drove inflation to double digits.
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“There’s slack in the labor market, and it’s rising, and the outlook for activity was lackluster, even before the energy shock,” she said at a Resolution Foundation event in London. “All of that means that firms and workers are likely to have less pricing power, less wage bargaining power, meaning second-round effects should be less likely.”
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While policymakers will remain alert to the possibility, there are risks on “both sides,” Breeden stressed.
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Traders are betting on the BOE raising interest rates around three times this year after the Monetary Policy Committee said last week it “stands ready to act” in response to the turmoil in energy markets. The BOE expects a spike in motor fuel costs to drive inflation to 3.5% in March and economists warn price growth could hit double the 2% target later this year.
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However, Breeden appeared to strike a cautious tone on Thursday against a backdrop of rising unemployment and tepid economic growth. Before the war, she was one of the rate-setters supporting faster rate cuts.
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On Wednesday, hawkish official Megan Greene said that the committee faces a harder trade-off than in 2022 when the labor market was tight, interest rates low and growth was fueled by a post-pandemic boom. She still warned of a lasting impact on inflation even in a scenario where tensions de-escalate rapidly.
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Breeden said that the BOE remains “alert” and noted that the latest shock comes after years of inflation being above the central bank’s 2% target. Bank rate is still in restrictive territory, she added.
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“It’s not wise to act before we have sufficient information,” Breeden said. “We’ll learn a chunk more by the time of the April decision on the balance of these risks.”
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