• Firms and workers are likely to have less price and wage bargaining power, so second round effects less likely
• Not wise to act before we have sufficient information
• Will know more on balance of risks and scale and duration of shock by April meeting
• No straight line between energy prices and rates
• Not surprising that rate expectations have moved

BoE’s Breeden is signalling a cautious and data-dependent approach to monetary policy, suggesting that the current economic context differs from the one we had in 2022. While energy costs remain a concern, Breeden noted that the transmission of these prices into the broader economy may not follow the same aggressive path because both firms and workers have less bargaining power. This suggests that “second-round effects”, where initial price spikes lead to a self-sustaining cycle of wage hikes and further price increases, are currently less likely to take hold.

Given these conditions, Breeden suggested that it would not be wise for the central bank to act before having sufficient information. The upcoming April meeting is viewed as key as the MPC expects to have a clearer understanding of the balance of risks, as well as the potential scale and duration of energy shock.

Furthermore, Breeden clarified that there is no straight line between energy prices and interest rates. While energy is a major component of inflation, the central bank’s response depends on how those prices influence long-term inflation expectations and underlying economic demand.

The market is currently fully pricing in two rate hikes by year-end with good chances of a third one. The probabilities of a rate hike at the April meeting stand around 73%.