BoE's Lombardelli Signals Possible Rate Hike if Energy Prices Stay High

Bank of England Deputy Governor Clare Lombardelli has said interest rates are likely to need to rise if energy prices remain elevated, unless there is clear evidence of a weaker economy or easing inflation.

Speaking at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw, Lombardelli warned that the longer higher energy prices persist, the greater the risk that their indirect effects build. She said inflation expectations, wage bargaining and price-setting behaviour could begin to adjust in response.

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

Lombardelli stressed that she was not advocating a mechanical monetary policy response to energy prices. Instead, she said policy should counter the risk that energy costs start to feed through into inflation expectations, wage bargaining and price-setting.

Her remarks point to the central bank's concern that a sustained energy price shock could become embedded in the wider economy, making it harder to return inflation to target.