UK Interest Rate Rise Increasingly Likely as Energy Prices Fuel Inflation Fears

A Bank of England deputy governor has warned that UK interest rates may need to rise if elevated energy prices continue to feed through into broader inflation pressures.

Speaking at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw, Clare Lombardelli said the energy shock linked to the conflict in the Middle East was likely to keep pushing UK inflation higher in the coming months. She noted that strong demand for AI-related components was already pushing up global export prices, while weather-related shocks added further upside risks to the outlook.

Lombardelli said trade diversion was currently helping to offset some inflationary pressure, but cautioned that the longer higher energy prices persisted, the greater the risk that indirect effects would build. She warned that inflation expectations, wage bargaining and price-setting behaviour could begin to adjust in response if the energy shock proved durable.

On that basis, she said monetary policy was increasingly likely to need to tighten if elevated energy prices persisted without clear evidence of disinflation or weaker economic activity. She stressed, however, that policy should not respond mechanically to movements in energy prices alone, saying the key issue was how higher energy costs interacted with the underlying economy and how that interaction was transmitted through the system.

The comments come amid a wider sell-off in global bond markets, with US 30-year Treasury yields reported to have hit their highest level since 2004, reflecting broader investor concern over inflation and fiscal pressures across major economies.