UK Interest Rates May Rise as Energy Prices Linger

A Bank of England deputy governor has warned that interest rates could rise if energy prices remain high. Clare Lombardelli, who voted to maintain UK interest rates at 3.75% last month, said the persistence of high energy prices could lead to a tightening of fiscal policy unless there is economic weakness.

She stated 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.'

Lombardelli emphasized that it's not just the spot price of energy itself but the interaction between the underlying economy, higher energy prices, and their transmission that will determine whether interest rates need to rise.

The Bank has predicted inflation will increase to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027, largely due to rising energy costs.