BoE's Lombardelli Warns High Oil Prices Increase Likelihood of Rate Hike

Bank of England Deputy Governor Clare Lombardelli warned that a sustained period of elevated oil prices, driven by conflict in the Middle East, would increase the probability of an interest rate hike. The comments signal growing concern at the central bank that persistent energy shocks could entrench inflation.

Hawkish Warning on Inflation Risks

In prepared remarks for a speech in Poland, Lombardelli noted that while businesses have so far absorbed some higher energy costs, their ability to continue doing so is finite. A prolonged energy price shock, she argued, raises the risk of inflation spreading through the economy via higher wages and prices, known as second-round effects.

"If energy prices remain high, and in the absence of clear evidence of second-round effects abating or a weakening in activity, monetary policy would increasingly need to be tightened," the speech text stated. However, Lombardelli also stressed that the policy response to energy price volatility would not be "mechanical," indicating that policymakers would assess the broader economic conditions before acting.

Market Context and Policy Stance

Lombardelli is considered a key swing voter on the Monetary Policy Committee. She voted with the 6-3 majority to hold interest rates steady on September 17 but had previously indicated a potential shift toward a more hawkish stance if inflation risks mounted.

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Her remarks come as global bond markets face renewed pressure and oil prices have surged. Brent crude is currently trading around $106 per barrel, up nearly 10% from its low earlier in the week, amid fears of a potential escalation in the U.S.-Iran conflict.

Delayed Economic Impact

Lombardelli observed that the indirect effects of higher energy costs have appeared more slowly than initially expected. She highlighted several developing trends:

• Wage growth has shown signs of slowing, with indications of further moderation in 2027 pay settlements.
• Evidence regarding household inflation expectations has been mixed.
• Corporate energy hedges that previously shielded companies from price spikes may be expiring, which could force businesses to pass on higher costs to consumers.

The deputy governor concluded that the longer energy prices remain elevated, "the more likely it is that indirect effects will eventually come through." She added that the current path for energy prices is aligning more closely with the Bank of England's adverse scenario published in July, suggesting a greater potential threat to its 2% inflation target.