“You can’t wait too long”: BoE’s Breeden warns on rate hikes amid energy shock
- BoE’s Sarah Breeden says a path toward lower energy prices is far from certain.
- The indirect pass-through from higher energy prices has remained limited so far.
- A larger and longer-lasting energy shock would increase the likelihood of a monetary policy response.
Bank of England (BoE) Deputy Governor Sarah Breeden said on Thursday that it is “not at all obvious” that there is a path toward lower energy prices, according to Reuters.
Breeden noted that the indirect pass-through from higher energy prices has remained limited so far, potentially reflecting slack in the United Kingdom (UK) economy. However, she warned that the larger and longer the energy shock persists, the more likely it becomes that monetary policy will need to respond.
The BoE policymaker added that the balance of risks has shifted and that a response from the central bank would become increasingly likely if those risks materialize. She also cautioned that policymakers cannot wait too long for conclusive evidence of second-round effects on prices.
Key takeaways
Not at all obvious that there is a path to lower energy prices.
Indirect pass through of energy price rises limited so far, suggests slack in economy.
The larger and longer the energy shock, the more likely policy will need to respond.
Balance of risks has shifted, if risks crystallise increasingly likely BoE will need to respond.
You can't wait too long for conclusive evidence of 2nd round effects.
I like to focus on what firms say about how they're approaching pricing decisions.
DMP survey, PMI, agents' survey are important for me.
Market reaction
Breeden’s comments have little immediate impact on the British Pound (GBP). GBP/USD remains under downward pressure, losing 0.12% on Thursday to trade around 1.3220 at the time of writing.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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