BoE Deputy Governor Warns Interest Rates May Rise If Energy Prices Persist

Bank of England Deputy Governor Clare Lombardelli said that interest rates may need to rise if energy prices stay high. She made this statement during a speech at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw, Poland.

Lombardelli emphasized that monetary policy should not react mechanically to energy prices but rather address the risk of them feeding into inflation expectations and wage-setting behavior. The key issue is not the spot price of energy itself, but its interaction with the underlying economy and how it affects inflation expectations.

The BoE's Deputy Governor also pointed out that food inflation has been higher than expected and could continue to put pressure on wage-setting if energy prices remain elevated. She noted that a 3.25% wage growth rate is consistent with the 2% inflation target in the long run, assuming normal import price inflation and 1% productivity growth.

Lombardelli's statement was made ahead of the BoE's next meeting in November, at which financial markets are predicting a roughly 75% chance of a quarter-point interest rate hike.