Breeden Signals Potential Rate Hike to Combat Rising UK Inflation

Bank of England Deputy Governor Sarah Breeden recently spoke at the UK Macro Policy Forum about the risks associated with rising inflation. According to Breeden, it is increasingly appropriate for the Bank Rate to respond to these risks by raising interest rates.

Breeden emphasized that policymakers should not wait too long for signs of second-round effects from high energy prices, as this could lead to regrettable consequences. She noted that the larger and longer the shock, the more likely it is that we'll see material second-round effects that policy needs to respond to.

The Bank of England's monitoring framework and scenario-based approach support a precautionary policy leaning, ready to respond to emerging inflation persistence despite uncertainty. While evidence remains limited for material second-round inflation yet, both Breeden and Chief Economist Huw Pill warned that the longer energy prices stay elevated, the higher the risk of wage-price spirals.