BOE’s New Deputy Governor Says UK Faces Two-Year Stagnation

Sarah Breeden, the nominee to be Bank of England deputy governor for financial stability, warned that over-zealous monetary tightening could cause an unnecessary recession.

(Bloomberg) — Sarah Breeden, the nominee to be Bank of England deputy governor for financial stability, warned that over-zealous monetary tightening could cause an unnecessary recession.

“We’re not forecasting a recession,” Breeden said in response to questions in Parliament ahead of her appointment to the Monetary Policy Committee. “It is not our intent to cause a recession, and the MPC will be very careful as it takes its decisions.”

In order to avoid a contraction, she said the MPC would have to balance “the risk of inflation becoming embedded and more persistent” against the significant amount of monetary tightening which the MPC has already enacted through a string of rate hikes — much of which is yet to filter through to the economy. 

For several months, BOE officials have been worrying that higher prices initially caused by the war in Ukraine and a post-pandemic surge in demand would lead to “second-round” inflationary effects, where workers bid their wages higher due to the increased cost of living.

“The challenge right now is that wages are high and are rising, and there is a real risk that the second-round effects mean that this inflation becomes embedded,” Breeden said. “And so that is something that I will focus on as I’m thinking about the challenge that you put in front of us.”

The remarks sidestepped clear indications of how Breeden might vote on interest rates when she joins the nine-member panel in November. She takes over from Deputy Governor Jon Cunliffe, who will retire after voting at the meeting concluding on Sept. 21.

Weighing Up

Breeden, whose first vote will be on Nov. 2, said that as a member of the MPC she would examine to what extent wage and price inflation is expected in the medium term, and would be “weighing that against the further tightening that is coming through.”

She conceded that there were a lot of “mixed signals” coming from recent data, including high wages, a loosening labor market and inflation coming down. “How those combine to help us come to a medium term judgment about what is happening to wages and pricing, that is what I will be looking at when I’m looking at interest rates in November,” she told lawmakers.

Read more: UK Labor Market Weakens With Highest Unemployment Since 2021

While Breeden said the Britain should avoid a recession, she predicted a stagnant economy in the coming years with inflation falling back to its 2% target in two years.

“I would expect relatively flat GDP in the UK over the next couple of years, as the impact of past increases in Bank Rate increasingly push down on demand, and supply remains very weak,” she wrote in a questionnaire released ahead of her appearance at the House of Commons Treasury Committee. 

Her comments suggest her views are broadly in line with the other internal rate-setters on the MPC. Governor Andrew Bailey and Chief Economist Huw Pill in recent weeks have suggested that the BOE is close to a turning point in it most aggressive hiking cycle in over three decades.  

Breeden’s questionnaire and comments reiterated many themes the BOE set out in its latest monetary policy report released in August. She said that risks to the BOE’s inflation forecasts are skewed to the upside after stronger-than-expected second round effects. 

“Over the next two years, demand should weaken and push the economy into excess supply, which will push down on inflation further via domestic channels,” she said. “I expect inflation to be around the 2% target in two years, conditional on the assumptions in the August forecast.”

Cunliffe was one of the BOE’s experts on cryptocurrency and was deeply involved in its consideration of whether to launch a central bank digital currency.

In her previous role on the Financial Policy Committee, Breeden said she had been very clear they crypto “is an asset that has no intrinsic value and whose price could go to zero, and therefore investors should be prepared to lose all of their money.” 

But she said that the technology underlying it “has the potential to bring benefits to the financial system.”

Read more: BOE Finds Support for Digital Pound After Project Rosalind Study


Having spent her entire career at the central bank, Breeden was also questioned on how she would avoid “groupthink” on the MPC — a criticism which has been leveled at the committee before as its internal members, as opposed to the “independent” external members who are not BOE employees, have often tended to vote the same way.

Breeden said that “independence of thought is important to me personally,” that she was unafraid of challenging peers and that she created a “safe space” in which others could challenge her. 

“I don’t assume I have all the answers, I listen because I might learn something,” Breeden said. 

She said she led the way on proposing changes to improving resilience in the so-called liability-driven investment or LDI sector, which was thrown into chaos during Liz Truss’s short-lived premiership last year.

There was also more that the BOE could do on improving its communication with the public, Breeden said. It is increasingly using video clips and social media to get its message across, she said, and it would look at following the European Central Bank’s example and participating in more podcasts.

(Updates with more of Breeden’s comments from the hearing)

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