Rate Rise 'Increasingly Likely' as Energy Prices Fuel Inflation

A Bank of England deputy governor has warned that a rate rise is increasingly likely if energy prices remain high. Clare Lombardelli made the comment during a speech in Warsaw, stating that elevated energy prices could drive policy-makers to tighten fiscal policy unless there is significant economic weakness.

The longer higher energy prices persist, the greater the risk of indirect effects building and inflation expectations adjusting, according to Ms. Lombardelli. This would lead to policy becoming increasingly likely to need to tighten if elevated energy prices persist, in the absence of clear evidence of disinflation or weaker activity.

Inflation has risen to a five-month high of 3.1%, moving further away from the Bank's 2% target rate. 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.