Energy Price Pressure Sparks Interest Rate Hike Fears

A Bank of England deputy governor has warned that interest rate hikes are becoming increasingly likely if energy prices remain high. Clare Lombardelli, a deputy governor at the central bank since 2024, made the comments during a speech in Warsaw.

Lombardelli said that energy price pressure could drive rate-setters to tighten fiscal policy unless there is particular weakness in the economy. She noted that the longer higher energy prices persist, the greater the risk of indirect effects on inflation expectations and wage bargaining.

The Bank has predicted that inflation will increase to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027. Lombardelli pointed out that there is material uncertainty about the size and duration of the shock, but a larger energy shock would lead to significant pass-through of higher energy costs to other prices.