UK interest rate rise ‘increasingly likely’ with high energy prices; inflation fears hit bonds – business live

Bank of England Deputy Governor Clare Lombardelli warned at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw that the ongoing energy shock stemming from the Middle‑East conflict is likely to keep UK inflation elevated in the months ahead, making a further rate rise “increasingly likely.” Lombardelli, one of six policymakers who voted to keep interest rates on hold at the most recent meeting, highlighted that without clear signs of a weakening economy the Bank may have to tighten policy if high energy prices persist. She stressed that the decision will hinge not on the spot price of energy alone but on how prolonged higher costs interact with the broader economy, influencing inflation expectations, wage bargaining and price‑setting behaviour.

The deputy governor also outlined several secondary pressures that could compound inflationary risks. Strong global demand for artificial‑intelligence components is already lifting export prices, while weather‑related shocks add further upside risk. Conversely, trade diversion is exerting a dampening effect on price growth. Lombardelli noted “material uncertainty” about both the magnitude and duration of the energy shock and raised the question of whether “second‑round effects” – where rising inflation fuels higher wages, which in turn feed back into inflation – are beginning to materialise. She cautioned that, although the energy price spike is a key driver, the transmission of those costs through the economy will ultimately determine whether the Bank Rate needs to be increased.

Lombardelli’s comments come as U.S. 30‑year Treasury yields reached their highest level since 2004, underscoring broader financial market concerns about persistent inflation. She warned that the longer elevated energy prices endure, the greater the risk that inflation expectations and wage negotiations will adjust, potentially entrenching higher price growth. While she stopped short of calling for an automatic policy response to energy price movements, the deputy governor’s remarks signal that the BoE is closely monitoring the interplay of energy costs, global supply pressures and domestic demand, and that a rate hike could be on the agenda if disinflation does not accelerate and economic activity does not show clear signs of weakening.

⚡ Effects Interpreter