It’s worth waiting to see how the US-Iran war develops before deciding whether to hike interest rates
Inflation risks are skewed entirely to the upside
Sluggish economy and loose labour market should limit second-round effects from energy shock

BoE’s Greene has been one of the most hawkish members in the MPC for a while as she kept warning on upside inflation risks even before the US-Iran war started. More recently, she’s been curiously neutral despite the energy shock adding to the upside inflation risk argument. In fact, she preferred keeping rates steady because in her view, the sluggish economy and loose labour market should limit second-round effects.

She’s mindful that a rate hike now could prove to be a policy error if the war leads to a severe global demand shock. She suggests that waiting until the impacts from the war are clearer would be better at this point. She remains concerned though that while headline inflation has dropped from its historic peaks, the “last mile” to the 2% target for core inflation remains the hardest. She has frequently pointed to services inflation and elevated wage growth as signs that domestic price pressures are not yet defeated.

The next policy meeting is in June and we will get more UK data before that. The market is pricing a 42% chance of a rate hike in June, so the data should sway the probabilities one way or the other. It goes without saying that US-Iran developments will also be key for interest rate expectations. The market is pricing in a total of 58 bps of tightening by year-end.