Energy Price Pressure Increases Likelihood of Rate Rise

A deputy governor at the Bank of England has warned that interest rates may need to rise if energy prices remain high. Clare Lombardelli said during a speech in Warsaw that energy price pressure could drive rate-setters to tighten fiscal policy unless there is particular weakness in the economy.

Lombardelli, who was part of the six-to-three majority that voted to maintain UK interest rates at 3.75% earlier this month, stated that 'the longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response.'

She emphasized that the key issue is not the spot price of energy itself but the interaction of the underlying economy, higher energy prices, and their transmission.

The warning comes after inflation lifted to a five-month high of 3.1% last month, moving further away from the Bank's 2% target rate.