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(Bloomberg) — Bank of England rate-setter Megan Greene warned there will be lasting effects for UK inflation even in a “best case” scenario where the conflict in the Middle East swiftly de-escalates.
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Greene said she is more worried about the war’s impact on inflation than the economy but added the trade-off facing policymakers is more balanced than in 2022 following Russia’s invasion of Ukraine.
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“I do think that the notion that supply will just go back to normal in the next two months, I think that’s wildly optimistic,” she said at a Jefferies conference in London Wednesday. “I think it will probably take longer than that, so I do think there will be lasting implications of this, even in the best-case scenario.”
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The BOE has signaled that it may need to raise interest rates to rein in a fresh spike inflation caused by disruption to energy supplies. While Greene and the rest of the Monetary Policy Committee held off hiking borrowing costs last week, markets believe there is a chance the panel moves at the next meeting in April.
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Traders have priced in as many as four hikes after the BOE said that it “stands ready to act” on inflation. It has predicted that a surge in motor fuel costs will push up inflation to 3.5% in March.
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While Greene said officials are facing a more benign domestic backdrop than in 2022, she cautioned that energy prices could remain elevated for some time.
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“Even if the Strait of Hormuz reopens, we now all know that Iran can close it when it wants to,” she said. “I wonder if there won’t be a premium baked into the energy prices on that basis… there are lots of mechanisms through which energy prices might remain elevated, even if the conflict ends tomorrow.”
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Firms and households may react more quickly after experiencing a painful squeeze four years ago, Greene said. However, she noted that the labor market is looser and interest rates higher than they were back then, with borrowing costs still bearing down on activity.
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“I think that the trade off could potentially be bigger this time,” she said. “I think there’s a significant upside risk to inflation, but there’s also greater downside risk to demand, given the starting point.”
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