BOE’s Breeden downplays wage-price spiral risk from Iran War

Investing.com -- Bank of England Deputy Governor Sarah Breeden said on Thursday that second-round effects from the Iran War "should be less likely," citing slack in the labor market and weak economic conditions that limit bargaining power for workers and firms.

Speaking at a Resolution Foundation event in London, Breeden said the UK central bank faces a different situation compared to 2022 when Russia’s invasion of Ukraine pushed inflation into double digits.

"There’s slack in the labor market, and it’s rising, and the outlook for activity was lackluster, even before the energy shock," Breeden said. "All of that means that firms and workers are likely to have less pricing power, less wage bargaining power, meaning second-round effects should be less likely."

Breeden said policymakers will remain alert to the possibility of a wage-price feedback loop, noting there are risks on "both sides."

The deputy governor appeared to strike a cautious tone against a backdrop of rising unemployment and tepid economic growth. Before the war, she was among rate-setters supporting faster rate cuts.

On Wednesday, BOE official Megan Greene said the committee faces a harder trade-off than in 2022 when the labor market was tight, interest rates low and growth was fueled by a post-pandemic boom. Greene warned of a lasting impact on inflation even if tensions de-escalate rapidly.

Breeden said the BOE remains "alert" and noted the latest shock comes after years of inflation being above the central bank’s 2% target. Bank rate is still in restrictive territory, she added.

"It’s not wise to act before we have sufficient information," Breeden said. "We’ll learn a chunk more by the time of the April decision on the balance of these risks."

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