Bank Deputy Warns Interest Rate Rise Likely if Energy Prices Persist

A deputy governor at the Bank of England has warned that a rise in interest rates is increasingly likely if energy prices remain high. Clare Lombardelli made the statement during a speech in Warsaw, where she highlighted the potential for indirect effects from higher energy costs to build and drive inflation expectations.

Lombardelli pointed out that the key issue is not the current spot price of energy, but rather its interaction with the underlying economy and how it affects transmission. This could lead to a rise in interest rates if elevated energy prices persist, unless there's clear evidence of disinflation or weaker activity.

The Bank of England has already kept interest rates steady at 3.75% earlier this month, but Lombardelli's comments suggest that further action may be needed. Inflation recently hit a five-month high of 3.1%, and the Bank predicts it will increase to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027.

Lombardelli also highlighted the potential for food price inflation to rise as manufacturers pass on higher energy costs to consumers. Food inflation has recently hit a two-year low of 1.3%, but is predicted to move towards 4% in the first quarter of next year, according to the Bank.

The Bank's deputy governor emphasized that there remains material uncertainty about the size and duration of the energy shock and how it will pass through the economy.