Bank of England deputy governor Clare Lombardelli warned that a rate rise is increasingly likely if energy prices stay high, because of indirect effects on inflation, wages, and price-setting behavior, though there remains material uncertainty about the size and duration of the energy shock.

She spoke in Warsaw after the Bank decided to hold rates at 3.75% in a 6–3 vote earlier this month.

Economists broadly expect the Bank to raise rates later in the year to bring inflation back toward the 2% target, with analysts linking the move to energy-driven inflation pressures.

The Bank has kept rates at 3.75% in the latest decision, with Lombardelli among the six-to-three voters choosing to hold amid inflation seen near target and expectations that energy costs will keep rising.

Inflation is expected to rise as energy costs feed through, with the energy price cap projected to increase and inflation forecast to reach about 3.7% in Q4 and 4.2% in Q1 2027; food price inflation is also expected to rise from a two-year low toward around 4% in Q1 2027.

The key dynamic is the interaction between the energy shock, the broader economy, and transmission mechanisms, rather than energy prices alone.

Lombardelli noted that the extent and duration of the energy shock will determine how much higher energy costs feed into other prices.

There remains material uncertainty about both the size and duration of the energy shock and its pass-through to the economy.

Her comments followed the Bank’s decision to hold rates and come as inflation hovers near target levels while energy costs are expected to rise, influencing inflation dynamics.

Inflation recently rose to a five-month high of 3.1%, moving away from the Bank’s 2% target as households face higher energy bills.

Overall, analysts and economists anticipate that a rate increase later in the year would help rein in inflation driven by energy costs.