The Bank of England’s Deputy Governor Sarah Breeden has said UK businesses’ efforts to absorb rising energy costs rather than pass them on to consumers could help the central bank contain inflation following the energy price shock caused by the Iran war.
Speaking in an interview on Thursday, Breeden said companies were responding differently to the current crisis compared with the energy shock of 2022, when Russia’s full-scale invasion of Ukraine triggered sharp increases in energy prices.
“What’s really different now, relative to when we had the last energy shock in 2022, is that people aren’t looking to push costs through,” Breeden said.
She added that businesses appeared more willing to absorb the impact of higher costs, making the task of monetary policymakers easier amid economic uncertainty.
Breeden’s remarks echoed comments made earlier in the week by Bank of England Governor Andrew Bailey, who also pointed to companies’ efforts to manage rising costs.
Since the start of the Iran war, Breeden has voted with the majority of the Monetary Policy Committee to keep interest rates unchanged. However, she indicated in September that she could reconsider her position if higher energy prices began feeding into broader inflation.
Financial markets are pricing in a quarter-point interest rate increase next month as almost certain.
Breeden, who is in Bangkok for the International Monetary Fund’s semi-annual meetings, also said she hoped wage growth would not accelerate as sharply as it did in 2022. She pointed to current weakness in the labour market as a factor that could limit wage pressures.
Earlier on Thursday, Bank of England Chief Economist Huw Pill cautioned that any interest rate increase should not be interpreted by investors as the beginning of a prolonged series of hikes.
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