Bank Deputy Warns of Interest Rate Hike Due to Prolonged High Energy Costs

A Bank of England deputy governor has warned that interest rates may rise if energy prices remain high. Clare Lombardelli, who voted to maintain UK interest rates at 3.75 per cent earlier this month, said prolonged high energy costs could drive rate-setters to tighten policy unless there is particular weakness in the economy.

The deputy governor highlighted that the interaction between the underlying economy, higher energy prices, and their transmission will determine whether the Bank of England needs to raise interest rates. She noted that the key issue is not the spot price of energy itself but its impact on inflation expectations, wage bargaining, and price-setting behavior.

Lombardelli pointed out that as long as high energy costs persist, there's a growing risk that indirect effects will build, causing inflation to rise further. She also mentioned a predicted 4 per cent increase in the UK's energy price cap from next week, which is likely to contribute to higher prices.

The Bank of England has forecasted inflation to reach around 3.7 per cent in the fourth quarter of this year and 4.2 per cent in the first quarter of 2027, with a predicted rise in food price inflation as manufacturers pass on higher energy costs to consumers.