- Firms and workers are likely to have less price and wage bargaining power, so second-round effects are less likely.
- It is not wise to take action before we have enough information
- More will be known about the balance of risks and the scale and duration of the shock by the April meeting
- No straight line between energy prices and rates
- It’s not surprising that rate expectations have changed
The BOE’s Breeden is signaling a cautious and data-dependent approach to monetary policy, suggesting that the current economic context is different from what we will have in 2022. While energy costs remain a concern, Breeden said the transmission of these prices to the broader economy may not follow the same aggressive path because both firms and workers have less bargaining power. This suggests that the “second round effect”, where an initial price increase leads to a self-sustaining cycle of wage increases and further price increases, is less likely to take hold at present.
Given these conditions, Breeden suggested that it would be unwise for the central bank to act before it had sufficient information. The upcoming April meeting is considered important as the MPC is expected to have a clear understanding of the balance of risks as well as the potential scale and duration of energy shocks.
Furthermore, Breeden clarified that there is no direct line between energy prices and interest rates. While energy is a key component of inflation, the central bank’s response will depend on how these prices affect long-term inflation expectations and underlying economic demand.
The market is currently fully expecting two rate hikes by the end of the year and there is a good chance of a third one as well. The probability of a rate hike in the April meeting is about 73%.
