Bank of England's Lombardelli Warns Rates Could Rise if Energy Prices Stay High

A Bank of England deputy governor has warned that UK interest rates are increasingly likely to rise if energy prices remain elevated, citing the risk of persistent inflationary pressure stemming from the conflict in the Middle East.

Speaking at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw, Clare Lombardelli said the energy shock linked to the Middle East conflict is likely to keep pushing UK inflation higher in the coming months. She noted that strong demand for AI components is already pushing up global export prices, while weather-related shocks add further upside risks to the inflation outlook. Trade diversion, she said, has had the opposite effect, helping to reduce inflationary pressure.

Lombardelli said the longer elevated energy prices persist, the greater the risk that indirect effects build across the economy, with inflation expectations, wage bargaining and price-setting behavior beginning to adjust in response. On that basis, she said policy is increasingly likely to need to tighten if energy prices remain high, absent clear evidence of disinflation or weaker economic activity.

She cautioned, however, that monetary policy should not respond mechanically to movements in energy prices. The central issue, she said, is not the spot price of energy itself, but how higher energy costs interact with the underlying economy and how that effect is transmitted through the system — a dynamic that will ultimately determine whether the Bank Rate needs to rise.