Key facts
- Bank of England Deputy Governor Sarah Breeden said it's increasingly appropriate to raise interest rates due to rising inflation risks.
- Breeden warned that prolonged high energy prices increase the risk of inflation expectations and wage-setting behavior adjusting.
- Fellow Deputy Governor Clare Lombardelli echoed concerns about persistent high energy costs fueling inflation.
- The Monetary Policy Committee held the benchmark rate at 3.75% last week, but Breeden and Lombardelli are considering shifting their votes.
- The BoE predicts UK inflation will exceed 4% early next year, more than double its 2% target.
- Investors anticipate a 75% chance of a 0.25 percentage point rate hike at the November meeting.
Two senior Bank of England officials suggested they are nearing a decision to raise interest rates as persistently high energy costs risk entrenching inflation. Deputy Governors Sarah Breeden and Clare Lombardelli, who both voted to hold the benchmark rate at 3.75% last week, indicated they are considering a shift.
Breeden warned that the longer high energy prices persist, the greater the risk of indirect effects on inflation expectations and wage-setting. She likened the situation to "sparks in the tinderbox," suggesting a potential need to "turn the hose on it" if inflation risks materialize.
Lombardelli echoed these concerns, stating that the longer and larger the energy price shock, the more likely policy will need to respond to second-round effects. She noted that while she was not ready to vote for a hike in September, she was mindful that the balance of risks had shifted.
Another MPC member, Swati Dhingra, who has previously advocated for lower borrowing costs, sounded a less urgent note. She suggested that the extent of long-term inflation pressures from the ongoing conflict would become clearer over the winter months and noted that Britain's job market is now weaker than in 2022.
Despite the nuanced views, investors are pricing in a 75% chance of a 0.25 percentage point rate increase at the BoE's next meeting in November, with another hike fully priced by February. Governor Andrew Bailey has previously stated that the decision not to cut rates earlier this year had already tightened financial conditions, but recently acknowledged that "the longer this goes on, the more difficult this becomes" regarding high energy prices.