Bank of England may lift rates if energy costs stay elevated

Deputy governor Lombardelli, who has served at the Bank of England since 2024, indicated that a rate hike is becoming more probable if energy prices remain high. She was part of the majority that kept the Bank rate at 3.75% earlier this month, but warned that sustained energy cost spikes could trigger higher inflation expectations, wage bargaining pressures, and broader price-setting adjustments. The key factor, she said, is not the spot energy price itself but how it interacts with the wider economy and its transmission mechanisms.

Inflation recently rose to 3.1%, moving away from the 2% target, and the Bank forecasts it could reach about 3.7% by the fourth quarter and 4.2% in early 2027. A larger and longer-lasting energy shock would likely lead to more pass-through of costs to other goods, including food, where inflation is expected to rise toward 4% in the first quarter of next year.