Breeden Sounds Alarm on High Inflation Risks in UK Economy

Sarah Breeden, Deputy Governor for Financial Stability at the Bank of England (BoE), has sounded the alarm on the risks associated with high inflation in the UK. The BoE's target is to keep inflation around 2%, but it currently stands at 3.8% after hitting a peak of near 4% in September. This has left consumers anxious about rising prices and worried about their jobs and the broader economy slowing down.

According to the BoE/Ipsos Inflation Attitudes Survey, median short-term inflation expectations are at 3.2%, while longer-term expectations are at 3.7%. This self-fulfilling prophecy of consumers expecting prices to keep climbing is a concern for central bankers.

Breeden warned that maintaining overly restrictive policy levels for too long could damage output and employment, citing the labor market's current slack as a buffer against significant second-round inflation effects. The BoE faces a calibration challenge with the Bank Rate at 3.75%, risk-tipping an already cautious economy into a downturn if rates are held high for too long.