Two senior Bank of England policymakers have signalled that they could support higher interest rates if elevated energy costs continue to push inflation higher.
Deputy Governors Clare Lombardelli and Sarah Breeden both supported keeping Bank Rate at 3.75% at the September meeting. However, both warned that prolonged energy price increases could create wider inflation pressures.
Lombardelli said the longer energy prices remain high and volatile, the greater the risk that higher costs spread through the wider economy. In particular, she pointed to possible changes in wage negotiations, inflation expectations and companies’ pricing decisions.
Breeden delivered a similar warning. She used the image of a “tinderbox” to describe the inflation threat and said repeated energy-price shocks could make further monetary tightening more likely.
Energy Prices Remain a Major Inflation Threat
The Bank of England has focused heavily on the impact of the Middle East conflict on oil, gas and refined fuel prices.
According to the Bank, Brent crude had risen by about 36% from the period before its July report. UK wholesale gas prices had climbed by around 78%. Those increases have also pushed up petrol, diesel and jet fuel costs.
Meanwhile, UK inflation reached 3.1% in August, and the Bank expects inflation to rise further over the coming quarters. Its September projections put inflation at around 3.75% in the final quarter of 2026 and slightly above 4% in the first quarter of 2027, based on energy prices at the time.
However, the Bank has not yet seen strong evidence that the energy shock has created widespread second-round effects.
That could change if high energy costs persist.
Policymakers Take Different Views on Rate Hikes
Not every member of the Monetary Policy Committee sees an immediate need for higher rates.
Swati Dhingra, who also voted to keep Bank Rate at 3.75%, has placed greater weight on weaker labour-market conditions and subdued demand. She has also highlighted the limited evidence so far that higher energy costs are producing broad-based inflation.
The September MPC meeting showed how divided policymakers have become. Six members voted to hold Bank Rate at 3.75%, while three members supported a 0.25 percentage-point increase to 4%.
As a result, the debate over Bank of England rates now depends heavily on how energy prices affect wages, businesses and consumer spending.
Markets Expect a Possible November Increase
Financial markets have already increased their expectations for a Bank of England rate hike.
Reuters reported that investors were assigning a significant probability to a quarter-point increase at the November meeting.
The Bank itself has not committed to a particular move. Instead, officials continue to stress that future decisions will depend on the size and duration of the energy shock and its impact on inflation.
Governor Andrew Bailey has also warned that the longer high energy prices continue, the more difficult the inflation outlook becomes.
Bank Faces a Difficult Inflation Balancing Act
The Bank of England now faces a delicate policy challenge.
On one side, higher energy prices could keep inflation above the 2% target for longer. If businesses begin passing higher costs through to consumers and workers demand larger pay increases, inflation could become more persistent.
On the other hand, higher interest rates can weaken household spending and business activity. The Bank has already noted that tighter financial conditions and a softer labour market are working against inflation.
Therefore, policymakers will closely monitor energy prices, wages, inflation expectations and domestic demand before deciding whether Bank of England rates need to move higher.
For now, the message from senior officials is clear: if the energy shock lasts long enough, the Bank may need to act more forcefully to prevent temporary inflation from becoming entrenched.
