UK Inflation Risk Looks More 2011 Than 2022 for Bank of England

kwnvcaa8cn33bi[}72jj4mwl_media_dl_1.png UK Office for National Statistic

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(Bloomberg) — When Britain was last hit by a major energy shock after Russia invaded Ukraine in 2022, the Bank of England cranked up interest rates to chase down spiraling inflation. This time is different.

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Four years ago, the spike in prices hit an overheating economy. Unemployment was at a 48-year low, vacancies were at a record high and wages were growing at the fastest pace this millennium. Households had pandemic savings to spend, the government was stoking demand and rates had just come off a record low of 0.1%.

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Today, unemployment is rising, vacancies falling, growth stalling and both monetary and fiscal policy bearing down on activity. Economic policy had its foot on the accelerator in 2022, urging inflation to its 11.1% peak. Slamming on the brake was the obvious response. Policy already has its foot on the brake now.

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“These are not the conditions of 2022 all over again,” said Simon French, chief economist at Panmure Liberum.

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At its interest-rate decision on Thursday, the BOE will likely signal whether it agrees. Before US and Israeli strikes on Iran brought Persian Gulf oil and gas traffic to a standstill, it had looked like the nine-member Monetary Policy Committee would have backed a quarter-point cut to 3.5%. Markets were pricing one further cut later this year.

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They are now betting there will be no cuts. Instead, traders are fully expecting a rate rise back to 4% by December. Economists unanimously expect rates to be held this week.

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Alongside the decision, the MPC will provide an initial assessment of the Iran conflict, which has driven up oil prices 42% and gas prices 57% since Feb. 28. It is likely to echo Office for Budget Responsibility economist David Miles, who last week told lawmakers higher energy costs will add about a percentage point to inflation — lifting consumer-price growth in the second half of 2026 to 3%, from the 2% forecast before the war.

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But Miles cautioned “it’s not clear which way we go from here.” Similarly, the bank’s guidance is likely to stress the unpredictability of events.

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For David Aikman, director of the National Institute of Economic and Social Research, the current situation is “more 2011 than 2022.” Rising oil and commodity prices drove inflation to 5.2% in 2011, but the MPC didn’t respond.

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The committee looked through the shock, assuming tighter policy “would increase the chances of undershooting the target in the medium term,” then-Governor Mervyn King said in a letter to the Chancellor of the Exchequer. His point was that the economy was weak enough, high energy prices would weaken it further and rate rises would have simply piled on more unnecessary misery.

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Similarly, the MPC’s attention had been shifting to rising unemployment — now at a five-year high — before the Iran war. Inflation was a receding threat, still at 3% but on track to hit the 2% target by April. Household expectations of inflation were also coming into line, falling to 3.2% last month from 3.5% in January. Now, there are fears for both the labor market and a fresh burst of inflation.