Energy Prices Fuel Interest Rate Warning for Bank of England

A Bank of England deputy governor has warned that interest rates may rise if energy prices stay high. Clare Lombardelli said that as long as energy prices persist, there's a growing risk that indirect effects build and inflation expectations adjust. This could lead to policy tightening, unless there is clear evidence of disinflation or weaker activity.

The deputy governor emphasized that it's not just the spot price of energy itself but its interaction with the underlying economy and how it's transmitted that matters. The Bank has predicted that inflation will increase to 3.7% in the fourth quarter of this year and 4.2% in the first quarter of next year.

Lombardelli pointed out that food price inflation is also expected to rise, moving from a two-year low of 1.3% to around 4% in the first quarter of next year. She said there's material uncertainty about the size and duration of the energy shock, but as it persists, higher energy costs will likely pass through to other prices.

The Bank has maintained interest rates at 3.75%, but if energy prices stay high, a rate rise may be necessary to control inflation. The longer energy prices persist, the greater the risk that indirect effects build and inflation expectations adjust in response.