BoE may raise rates if high energy prices fuel inflation, Lombardelli warns

Bank of England deputy governor Clare Lombardelli said the central bank may need to raise interest rates if high energy prices continue to sustain inflation in the United Kingdom.

Speaking on 24 September at a macroeconomic policy conference in Warsaw, Lombardelli said the energy shock linked to the conflict in the Middle East was likely to push UK inflation higher in the coming months. Businesses had proved more resilient to higher energy costs than the Bank expected, she said.

Risk of second-round inflation

Lombardelli warned that prolonged high and volatile energy prices increased the risk of wider pass-through into wages and domestic prices. She described the size and duration of the energy shock as materially uncertain.

She said tighter policy was becoming increasingly likely unless there was clear evidence of disinflation or weaker economic activity. However, she said the Bank would not respond mechanically to spot energy prices, with the outcome depending on how the shock interacted with the economy and fed into wages and prices.

Lombardelli was one of six Monetary Policy Committee members who voted last week to keep rates unchanged. Three members voted for an increase.

Bond yields rise with oil

As oil prices climbed, the yield on 30-year US Treasury bonds reached 5.4583%, its highest level in 22 years. The 10-year US yield also rose to its highest point since 2007.

Brent crude gained almost 4% to $107.13 a barrel. UK 10-year gilt yields rose to 5.385%, while 30-year yields increased by about seven basis points to 5.88%.

Breeden says conditions differ from 2022

Bank of England deputy governor Sarah Breeden said current divisions on the MPC involved a move of 0.25 percentage points up or down. She said that was not comparable with 2022, when the central bank faced a much larger challenge.

The FTSE 100 fell 25 points, or 0.24%, to close at 10,679.