By William Schomberg
WASHINGTON, April 14 (Reuters) – Bank of England interest rate-setter Megan Greene said on Tuesday it could take months to see how much long-lasting damage is caused to Britain’s economy by the energy price spike, but she expects new price pressures to be a bigger risk than a downturn in demand.
Greene, who was among the BoE’s policymakers most worried about inflation getting stuck too high before the Iran war, said the danger of an economic slowdown was important, but the upside risks to inflation were “paramount” to her thinking.
“We’ve had inflation above target for the best part of five years in the UK,” she told an event organised by the Atlantic Council think tank in Washington on the sidelines of the International Monetary Fund and World Bank spring meetings.
“We’re not the only ones, but it has been above target for five years. So to my mind, the inflationary piece of this is really important,” Greene said.
She said the impact of previous economic shocks in Britain, such as Russia’s 2022 invasion of Ukraine, had not worn off before the U.S. and Israel attacked Iran on February 28, which initially more than doubled the price of natural gas, something Britain relies on for power generation and home heating.
Greene said it could be a “significant risk” to wait for firm evidence that inflation pressures from the Iran war were becoming entrenched in the British economy.
“We can’t wait to have all the definitive data showing that there are second-round effects because then we will be too late already, so it will have to be a judgment call,” she said.
Greene pointed to a sharp rise in consumer inflation expectations since the start of the war, but noted that business surveys offered more nuanced signals around the behaviour of companies.
The BoE’s Monetary Policy Committee last month voted unanimously to keep rates on hold and said it was “ready to act” to keep inflation on track for its 2% target against the backdrop of a surge in energy prices.
Investors now expect between one and two rate hikes this year, although BoE Governor Andrew Bailey said they were getting ahead of themselves by betting on increases in borrowing costs, given the possibility that rate hikes could hurt Britain’s economy.
Greene said in March that the risk of inflation persistence had risen “perhaps significantly” and that British households might now be more sensitive to inflation shocks.
The BoE is due to announce its next interest rate decision on April 30. Investors are pricing a less than one-in-five chance of a quarter-percentage-point hike at that meeting.
(Reporting by William Schomberg; Writing by Andy Bruce; Editing by Paul Simao)
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