Energy Price Surge Could Push Interest Rates Higher, Warns Bank of England

The Governor of the Bank of England, Andrew Bailey, has indicated that high energy prices will make it harder for the central bank to maintain interest rates at their current levels. This comes as the UK is set to witness a roughly 4% rise in the energy price cap from next week.

Bailey stated that 'the longer we go on with high energy prices, the harder it gets' to keep interest rates low. He noted that while the Bank has not yet increased bank rates, it will become increasingly difficult to maintain this stance if energy prices remain high.

The comments from Bailey follow those of Deputy Governor Clare Lombardelli, who said on Thursday that energy price pressure could drive rate-setters to tighten fiscal policy unless there is particular weakness in the economy. Lombardelli warned 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.'

The Bank of England 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.