Headwinds set to force interest rate hike, says boss

By the Editorial Team · Friday, September 25, 2026

Bank of England deputy governor Clare Lombardelli warned that sustained high energy prices could lead the central bank to raise interest rates further to combat rising inflation, which recently reached 3.1%. This signals increased monetary tightening ahead if energy costs continue to drive inflation expectations, wage pressures, and higher prices across the economy.

The Bank of England is increasingly likely to raise interest rates if elevated energy prices persist, a senior policymaker warned this week. Clare Lombardelli, the Bank’s deputy governor responsible for monetary policy, indicated that prolonged high energy costs could prompt further tightening measures to curb inflation, which recently hit a five-month high of 3.1%.

Lombardelli, speaking at a conference in Warsaw, acknowledged that while UK companies have so far shown resilience in absorbing the surge in energy costs linked to the ongoing conflict in Iran, this capacity has limits. She highlighted the risk that sustained energy price pressures could lead to higher inflation expectations, intensified wage demands, and increased prices for goods and services. “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 in response,” she stated.

The Bank of England held its key interest rate at 3.75% earlier this month, with a majority of six to three voting to keep it steady. However, Lombardelli’s remarks align with a hawkish stance shared by other officials, including Governor Andrew Bailey, who cautioned that further rate rises could become necessary if volatility in energy markets continues. Three members of the Monetary Policy Committee had preferred an immediate increase at the previous meeting, reflecting concern over inflationary pressures.

The central bank currently forecasts inflation to rise above its 2% target, with expectations of 3.7% by the fourth quarter of 2026 and 4.2% in the first quarter of 2027. Key contributing factors include a 4% scheduled increase in the energy price cap next week and pressures on food prices driven by energy costs, drought conditions, disruptions to fertilizer supplies, and weather risks associated with the El Niño phenomenon.

Lombardelli emphasized that the critical question is not the current energy prices per se but how these costs transmit through the broader economy. She noted there is limited evidence so far of companies passing higher energy costs onto other goods and services, and while wage growth has slowed, real household earnings remain under pressure. According to her, a sharper pay squeeze may be necessary to bring inflation back toward the Bank’s target, particularly if energy prices remain elevated.

The remarks contrast somewhat with views from the Organisation for Economic Co-operation and Development (OECD), which recently suggested that UK monetary policy is already sufficiently tight to control inflation, differing from the approach taken by the US and Eurozone in response to the energy shock.

Financial markets currently price in the possibility of up to four quarter-point interest rate hikes in the UK by the end of next year, underlining the growing expectation that further tightening may be required should energy cost pressures persist and impact the economy more broadly.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.