By Paul Hannon
The Bank of England should not rush into a decision on how best to respond to the conflict in the Middle East, but must be alert for signs that wage rises are set to pick up again, Deputy Governor Sarah Breeden said Thursday.
The BOE last week left its key rate unchanged, and said it stood ready to act if the jump in energy prices that has accompanied the conflict threatens to lead to persistently high inflation.
However, Breeden said policymakers must remain patient, and that there is a possibility that inflation could fall below target over coming years if there is a significant impact on economic growth.
"It is not wise to act before we have sufficient information," she said. "We have to be alert to second round effects but there are risks on both sides."
The impact of the war on the U.K. was highlighted Thursday by new forecasts from the Organization for Economic Cooperation and Development.
Of the 20 economies for which it provided projections, the largest downgrade was reserved for the U.K., where growth in 2026 is now seen at 0.7%, down from 1.2% in the December projections.
But the U.K. also saw one of the largest increases in the inflation forecast, with prices now seen rising by 4% this year, having previously been expected to rise by 2.5%.
Breeden said policymakers would know "a chunk more" by the time they next meet to set rates on April 30.
Following the central bank's comments last week, investors expect to see two to three quarter-point rate rises from the BOE this year.
But Breeden said the path for rates remains open.
"You can't draw a straight line between oil and gas prices and the likely path for bank rate," she said. "That really depends heavily on the context in which the shock occurs."
European policymakers have been chastened by a sharp rise in energy and food prices after Russia's full-scale invasion of Ukraine in 2022. That led to a jump in wage demands and higher prices for a range of labor-intensive services. As a result, inflation stayed above their target for longer than they had expected.
However, Breeden said the situation now is "very different," with borrowing rates still restraining activity, inflation at lower levels, and more slack in the jobs market given an outlook for the economy that was "lackluster" even before the war started.
In this context, Breeden said workers may feel they have less leverage to push for higher wages, and businesses will be less confident of raising their prices without losing sales. As a result, she said "second round effects are less likely."
But there is another big difference. As Russia launched its full-scale invasion of Ukraine in early 2022, British households had experienced a long period of low inflation. This time around, they may respond more quickly to surging energy prices by demanding higher wages.
"So it's on us to remain alert given the need to manage the risk of second round effects," Breeden said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
March 26, 2026 07:39 ET (11:39 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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