Bank of England Warns Rates May Rise if Energy Prices Persist

Bank of England deputy governor Clare Lombardelli has warned that interest rates are increasingly likely to rise if high energy prices persist. Speaking at a conference in Warsaw, she said companies have shown a surprising ability to absorb higher energy costs but that capacity has limits.

Lombardelli emphasized that the key issue is not whether second-round effects are already visible in the data, but whether the conditions for those effects are becoming more entrenched. She added that policy is increasingly likely to need to tighten if high energy prices persist, unless there is clear evidence of disinflation or weaker economic activity.

The Bank of England's hawkish stance has been reinforced by Lombardelli's comments, following its decision to leave rates unchanged at 3.75 per cent last week. Three members of the Monetary Policy Committee preferred an immediate increase, while governor Andrew Bailey also warned that policy may have to tighten if turmoil in energy markets lasts longer.

Market pricing indicates a growing chance of further tightening, with four quarter-point rate increases in the UK priced in by the end of next year. This contrasts with the OECD's view that UK monetary policy is already tight enough to keep inflation under control.