Energy Price Pressure Triggers 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 made the comment during a speech in Warsaw, saying that elevated energy costs could drive policy to tighten unless there is significant weakness in the economy.

Lombardelli noted that the longer higher energy prices persist, the greater the risk of indirect effects building and inflation expectations adjusting accordingly. She stated that policy may need to tighten if elevated energy prices continue, absent clear evidence of disinflation or weaker activity.

The Bank of England has predicted that inflation will rise to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027. Lombardelli also pointed to a predicted increase in food price inflation, with households set to witness a roughly 4% rise in the energy price cap from next week.