Bank of England Officials Warn High Energy Prices May Force Interest Rate Hike

Bank of England officials have warned that prolonged high energy prices could force an interest rate hike. Deputy Governors Clare Lombardelli and Sarah Breeden indicated they are becoming more open to supporting an increase in borrowing costs.

Lombardelli said the longer elevated energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage negotiations, and price-setting behavior begin to adjust in response. She noted that the central bank would have to monitor how the energy shock spreads through the wider economy.

Breeden warned policymakers of an impending need to turn the 'hose' on the economy if it continues to be affected by global energy markets. The Bank of England has so far kept its benchmark interest rate at 3.75%, despite renewed inflationary pressure from the Iran conflict and disruption to energy supplies.

The central bank warned last week that it could raise rates if the conflict continued to affect global energy markets. It also projected UK inflation could rise above 4% early next year, more than twice its 2% target.