Bailey Warns High Energy Prices Will Make Interest Rate Hikes 'Harder'

Bank of England Governor Andrew Bailey warned that high energy prices will make it increasingly difficult for the central bank to maintain interest rates at their current levels. This comes a day after Deputy Governor Clare Lombardelli said a rate hike is looking 'increasingly likely' if energy prices remain elevated.

Bailey indicated that the Bank could have to increase interest rates if energy prices 'remain higher' amid pressure linked to the conflict in the Middle East. He noted that while there has been subdued pass-through of energy costs so far, it will become harder to maintain current interest rates as time goes on.

The Bank has predicted that inflation will increase to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027. Economists widely predict that the central bank will increase interest rates later this year to help bring inflation down back to its 2% target level.

Bailey's comments come as households are set to witness a roughly 4% rise in the energy price cap from next week, with higher energy costs continuing to filter through and drive up inflation expectations.