Energy Price Shock Could Force Bank of England Rate Hike

Bank of England Governor Andrew Bailey has indicated that high energy prices could make it harder for the central bank to maintain interest rates at their current levels. The increase in energy costs is putting pressure on inflation, which is expected to rise to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027.

According to Bailey, 'the longer we go on with high energy prices, the harder it gets' to maintain interest rates at their current level of 3.75%. This comes after a deputy governor at the Bank, Clare Lombardelli, said earlier this week that policy is 'increasingly likely' to need to tighten if elevated energy prices persist.

The energy price cap is set to rise by around 4% from next week, which could further exacerbate inflation. Economists have widely predicted that the central bank will increase interest rates later this year in a bid to bring inflation down to its target level of 2%.