Rate rise ‘likely’ if energy prices stay high - Bank

A rise in interest rates by the Bank of England is looking “increasingly likely” if energy prices remain high, a deputy governor has said.

Clare Lombardelli said energy price pressure could drive rate-setters to tighten monetary policy unless there is particular weakness in the economy.

Ms Lombardelli, who has been a deputy governor at the Bank since 2024, was one of the six-to-three majority who voted to maintain UK interest rates at 3.75 per cent earlier this month.

She said: “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.

“On that basis, policy is increasingly likely to need to tighten if elevated energy prices persist, absent of clear evidence of disinflation or weaker activity.

“The key issue is not the spot price of energy itself but the interaction of the underlying economy, higher energy prices, and the nature of their transmission.

“That, ultimately, is what will determine whether the Bank rate needs to rise.”

The caution comes after inflation lifted to a five-month high of 3.1 per cent last month, moving further away from the Bank’s two per cent target rate.

Inflation is widely predicted to keep rising over the coming months as higher energy costs continue to filter through, with households set to witness a roughly four per cent rise in the energy price cap from next week.

The Bank has predicted that inflation will increase to around 3.7 per cent in the fourth quarter of this year and 4.2 per cent in the first quarter of 2027.

Ms Lombardelli added: “There remains material uncertainty about the size and duration of the shock and how it will pass through the economy.

“But the larger the energy shock becomes and the longer it persists, the more likely it is that we will eventually see significant pass-through of higher energy costs to other prices.”

Food inflation recently hit a two-year low of 1.3 per cent, but is predicted to move towards four per cent in the first quarter of next year.

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