BoE Deputy Governor Warns of Interest Rate Hike Risk Amid Elevated Energy Prices

Bank of England Deputy Governor Clare Lombardelli has warned that interest rates may need to rise if energy prices remain high. In a speech at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw, Lombardelli stated that elevated energy prices could lead to indirect effects such as increased inflation expectations and wage growth.

Lombardelli emphasized that monetary policy should not react mechanically to energy prices but rather counter the risk of them influencing inflation expectations and price-setting behavior. She pointed out that the key issue is not the spot price of energy itself, but its interaction with the underlying economy and how it is transmitted into inflation.

Lombardelli's comments come as financial markets are pricing in a roughly 75% chance of a quarter-point interest rate hike at the BoE's next meeting in November. The deputy governor also noted that wage growth of around 3.25% could be consistent with the 2% inflation target, assuming normal productivity and import price inflation.