Global Market: BoE officials signal growing openness to rate hike as energy costs stay high

Two senior Bank of England interest rate-setters indicated on Thursday that they were moving closer to supporting an increase in borrowing costs, as persistently elevated energy prices heightened concerns that inflation could remain above target for longer.

Deputy Governors Clare Lombardelli and Sarah Breeden, who both backed keeping the BoE's benchmark interest rate at 3.75% last week, said they were reassessing their positions as the energy shock continued to feed through the economy.

Lombardelli, speaking in Warsaw, warned that a prolonged period of higher energy prices could increase the risk of second-round effects on inflation. These could include changes in inflation expectations, wage negotiations and the way businesses set prices, according to Reuters.


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Breeden delivered a similar warning at the London Macro Policy Forum organised by the National Institute of Economic and Social Research. She said the central bank would closely monitor the scale of the energy shock and how extensively it was spreading into the wider economy.

BoE warns inflation could rise above 4%
The Bank of England has so far held back from following the Federal Reserve and European Central Bank in raising interest rates. However, policymakers warned last week that the central bank could tighten policy if the conflict involving Iran continues to disrupt energy markets.

The BoE expects Britain's inflation rate to rise above 4% early next year, more than twice its 2% target.

The latest comments from Lombardelli and Breeden suggest the debate within the Monetary Policy Committee is shifting as policymakers assess whether higher energy costs could become embedded in domestic inflation.

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Dhingra takes more cautious view
Swati Dhingra, another member of the Monetary Policy Committee, struck a less urgent tone on Thursday.

Dhingra said the longer-term impact of the energy shock on British inflation would become clearer over the coming winter months. She also noted that Britain was not currently experiencing the broad-based inflation pressures seen in 2022, when energy prices surged following Russia's invasion of Ukraine.

The weaker labour market compared with that period could also limit the extent to which higher energy costs feed into wages and broader price-setting behaviour.

Markets price in November rate hike
Financial markets are increasingly pricing in a higher probability of a BoE rate increase at its next meeting in November. Investors were assigning roughly a 75% chance of a 25-basis-point increase, while another hike was fully priced in by February.

Governor Andrew Bailey has previously said that the BoE's decision to hold off on expected rate cuts earlier this year had already contributed to tighter financial conditions.

However, Bailey also warned last week that the longer the energy disruption continued, the more difficult the inflation outlook would become. He is scheduled to speak publicly on Friday.

Energy markets remain key to BoE decision
The path of energy prices and developments around the Strait of Hormuz are likely to remain central to the BoE's assessment of monetary policy.

Analysts at Investec said the central bank could move toward a 25-basis-point increase in November unless there was meaningful progress that allowed energy flows through the Strait of Hormuz to resume substantially.

The contrasting comments from BoE policymakers highlight the uncertainty facing the central bank as it weighs the risk of persistent inflation against a weakening domestic economy. The coming months will provide further evidence on whether the energy shock remains largely temporary or begins to generate broader and more lasting inflation pressures.

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