BoE’s Breeden: ‘Lackluster’ Growth is the UK’s Disinflationary Shield

Bank of England Deputy Governor Sarah Breeden argued today that “second-round effects” from the Iran energy shock are less likely to take root in the UK. Citing rising slack in the labor market and a lackluster outlook for economic activity, Breeden suggested that diminished pricing power for firms and workers acts as a natural buffer against a wage-price spiral.

Speaking at an event today, Breeden offered a measured assessment of the UK’s inflationary trajectory in the wake of Middle East tensions. Rather than signaling an immediate policy tightening, she pointed to the underlying fragility of the UK economy as a protective factor. Breeden noted that the outlook for activity was “lackluster” even before the recent energy spike, suggesting that the economy is already in a state of weakened demand that prevents higher costs from being easily passed on to consumers.

“All of that means that firms and workers are likely to have less pricing power, less wage bargaining power,” Breeden explained. This assessment hinges on the idea that the UK’s cooling labor market will prevent the “wage-price feedback loop” that typically follows a commodity shock.

Additionally, Breeden explicitly stated that it is “not wise to act” before the Monetary Policy Committee has sufficient information, noting that the Bank expects to learn a “chunk more” by the time of the April decision.