BOE Rate Rise Increasingly Likely if Energy Prices Stay High, Deputy Governor Says

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The need for a rate rise by the Bank of England will grow if energy prices remain high, unless the economy weakens, Deputy Governor Clare Lombardelli said Thursday.

The central bank last week left its key interest rate unchanged, diverging from its peers, which have all lifted borrowing costs since energy prices jumped in response to the U.S.-Iran war.

Lombardelli was one of six members of the Monetary Policy Committee to vote for a hold, with three backing a rise in the key rate to 4% from 3.75%.

But in a speech, she said the vote may change if energy prices remain high.

"Policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity," she said.

However, Lombardelli said policymakers should not respond "mechanically" to energy prices, and instead consider the transmission of higher energy costs through the economy.

The U.K.'s annual rate of inflation rose to 3.1% in August from 2.9% in July, well above the BOE's 2% target. However, that pickup was largely confined to energy, with little sign of an acceleration in the prices of services.

While reassuring for now, Lombardelli said it is too early to conclude that the surge in energy costs will have no or only limited indirect or second-round effects on prices.

"The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behavior begin to adjust in response," she said.

 
 

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