Bank of England’s Breeden Warns of Two-Sided Inflation Risks

Sarah Breeden, Bank of England deputy governor for financial stability, said policymakers face risks from both persistent inflation and excessively restrictive interest rates as household expectations remain elevated.

“We face risks on both sides – that greater persistence means inflation turns out to be sticky not bumpy, and that unexpectedly weak demand causes an unanticipated easing in price pressures,” Breeden said in a Sept. 30, 2025, speech.

Median one-year inflation expectations reached 4% in the Bank of England’s May 2026 Inflation Attitudes Survey. Two-year expectations were 3.5%, while five-year expectations stood at 3.9%. The central bank’s inflation target is 2%.

UK headline inflation reached 3.8% in August 2025 and was expected to approach 4% in September. Food-price inflation was 5.1% in August, with agricultural commodity prices and adverse weather among the main contributors.

About 40% of the United Kingdom’s food is imported, leaving domestic prices sensitive to global agricultural markets. The sensitivity of household inflation expectations to food prices had nearly doubled after 2022. A 1-percentage-point increase in food’s contribution to consumer-price inflation was associated with an estimated 1.8-percentage-point increase in one-year expectations, compared with about 1 percentage point historically.

Around 10% of households said they would seek higher pay from their current employer if inflation expectations increased. Higher wage demands and business costs can reinforce inflation after an external shock, while weaker employment and demand can limit those effects.

“Monetary policy cannot influence energy prices and so should generally look through their direct effects on inflation,” Breeden said in the Monetary Policy Committee’s April 2026 minutes. “But it can, and should, lean against the second-round effects as households and firms respond.”

The Monetary Policy Committee maintained Bank Rate at 3.75% on Sept. 16, 2026, in a 6-3 vote. A quarter-point increase to 4% was favored by the other three members. The minutes described inflation risks as tilted upward while pointing to soft labor-market conditions and limited evidence of material second-round effects.

Breeden also warned that holding rates too high for too long could weaken the economy.

“Holding policy too tight for too long comes with costs to output and employment, which could then pull inflation below target,” she said.