Bank of England officials have indicated that interest rates may need to rise later this year if energy prices continue to increase, adding pressure on households and businesses. Deputy Governors Clare Lombardelli and Sarah Breeden signaled that borrowing costs, currently at 3.75 percent, could be pushed higher if the surge in oil and gas prices persists.

Speaking at events in Poland and London, Lombardelli and Breeden highlighted the risk that prolonged elevated energy costs could lead companies to pass on higher expenses to consumers, putting upward pressure on inflation. Lombardelli said the case for tightening monetary policy was growing despite signs of a slowing economy, noting that inflation expectations and wage negotiations might adjust in response to sustained price shocks.

“The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust,” Lombardelli explained. She added that while current data did not yet show widespread second-round inflation, the conditions for such developments were becoming more entrenched.

Breeden echoed this view, stating that it was “increasingly appropriate for Bank Rate to respond” to persistent energy-related cost pressures. Both officials’ remarks align with previous statements by Bank Governor Andrew Bailey, who has said further rate increases might be necessary to manage inflation.

The warnings come amid a recent spike in oil prices, which jumped above $107 a barrel, and a 3 percent rise in wholesale gas prices. These increases coincided with ongoing geopolitical tensions, including a lack of progress at the United Nations summit on US-Iran relations, as well as missile interceptions by Saudi Arabia from Yemen’s Iran-backed Houthi forces.

The Bank projects inflation will remain elevated, with headline Consumer Price Index (CPI) inflation expected to reach 4.2 percent early next year—more than double the Bank’s 2 percent target. Additionally, household energy bills are forecast to increase by 24 percent by early 2027, potentially pushing average annual gas and electricity costs above £2,000.

Despite backing the recent decision by the Monetary Policy Committee (MPC) to keep rates unchanged in a 6-3 vote, Lombardelli is seen as a potential swing vote in future meetings, with markets anticipating interest rate hikes later in 2024 and into 2027. Another MPC member, Swati Dhingra, who also supported the hold, cautioned that the labor market remained relatively weak.

Internationally, long-term borrowing costs are rising sharply. US 30-year Treasury yields hit 5.43 percent, the highest since 2004, while UK 30-year gilt yields reached 5.87 percent, near levels not seen since 1988. Market analysts currently assign a roughly 70 percent likelihood that the US Federal Reserve will follow up its expected rate increase this month with another hike in October.