Bank of England warns Iran war may sustain inflation pressure

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BoE warns Iran war inflation

Highlights

Bank of England's Megan Greene warns repeated supply shocks, including risks from the Iran conflict, may sustain UK inflation pressures and complicate monetary policy.
Greene indicates potential for a BoE rate hike in coming meetings due to second-round effects of higher energy prices impacting wage and price setting after about a year.
Catherine Mann highlights uncertainty over Prime Minister Keir Starmer's future could weigh on inflation by dampening business and household decision-making, risking weaker growth.

Monetary policy concerns over supply shocks

As reported by Reuters, Greene says repeated supply shocks are changing how central banks should respond to inflation risks, arguing that older assumptions about looking through such disruptions no longer hold.

Speaking at a Financial Times event on Monday, she says this is the third negative supply shock in five years and that policymakers have to worry about wage and price setting. Greene says second-round effects from higher energy prices, including stronger pay demands and broader price increases by companies, would take about a year to become visible.

Greene voted with the majority of the Bank of England's Monetary Policy Committee to keep rates unchanged in April, but she said at the time that a rate increase might be needed at upcoming meetings.

Split signals for UK rate outlook

Another MPC member, Catherine Mann, says she is waiting for more evidence, including official April inflation figures due on Wednesday and other forward-looking indicators, to assess upside risks to inflation.

Mann also tells Reuters on the sidelines of a conference in Budapest that uncertainty over the future of British Prime Minister Keir Starmer could weigh on inflation in the opposite direction by hurting decision-making among firms and households. She says that kind of instability tends to encourage a wait-and-see approach, which is negative for growth.

Markets and economists remain divided on the Bank of England's next move. Investors are pricing in at least two BoE rate hikes before the end of the year, while most economists polled by Reuters last week expect borrowing costs to remain unchanged.

Our earlier coverage of Morningstar DBRS’s confirmation of the UK’s AA rating highlighted how renewed energy-price pressures and elevated inflation were weighing on growth while fiscal consolidation progressed only gradually. We also noted that the Bank of England was staying cautious as the duration of the energy shock—and the risk of second-round effects—would be key to the future policy path.

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