BoE Rate-Setters Warn of Inflation Risks as Energy Prices Persist

Two senior Bank of England interest rate-setters, Clare Lombardelli and Sarah Breeden, suggested on Thursday that they are getting closer to voting for an increase in borrowing costs. The reason is the persistent high energy prices, which raise the risk of inflation getting stuck at high levels.

Lombardelli said in a speech in Warsaw that the longer high energy prices persist, the greater the risk that indirect effects build and inflation expectations, wage bargaining, and price-setting behavior begin to adjust. Breeden made a similar warning, saying 'the more sparks we're throwing in the tinderbox, the more likely we might have to turn the hose on it.'

Breeden also said the BoE will watch carefully for signs of how big the energy price shock is proving and how much the rise is filtering through into the broader economy. The UK's central bank has so far not followed the US Federal Reserve and the European Central Bank in raising rates, but it warned last week that it might follow suit if the Iran war drags on.

Investors are assigning a 75% chance of the BoE raising its Bank Rate by a quarter of a percentage point at its next meeting in November. Another hike was fully priced in by February. Analysts at bank Investec said they now see the probability of the BoE moving at its next MPC meeting, and predict that unless there is material progress in negotiations that see substantial energy flows resume transit through the Strait of Hormuz, a 25bp rate hike will likely occur.