A rise in the cost of borrowing looks increasingly likely after two of the Bank of England’s interest rate-setters hinted at changing their vote from hold to hike in the wake of rising energy prices.
Clare Lombardelli and Sarah Breeden, two of the Bank’s deputies who sit on the monetary policy committee, voted to keep interest rates unchanged at its meeting last week. Three of the nine members have voted to increase borrowing costs at its last two meetings.
However, the governor Andrew Bailey warned that a rate rise could be imminent and yesterday the two deputies spoke about their concerns over rising oil prices. Traders are forecasting four interest rate rises from the Bank in the next 12 months.
Ms Lombardelli told a conference in Warsaw: “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.”
At an economic policy forum in London, Ms Breeden said it was becoming “increasingly appropriate for Bank rate to respond” to the climb in global energy prices.
Their comments raised the prospect of a rise in borrowing costs to 4% from 3.75% which would be the first increase in three years unless there is a substantial fall in oil prices.
A surge in global oil prices in the ongoing US-Iran war means consumer price inflation is likely to breach 4% by the end of the year, double the central bank’s 2% target.
Lombardelli said the “indirect effects” of rising oil prices on other parts of the economy, such as wages, and other prices had “been more limited than expected”.
But policymakers are worried that a continuation of the conflict, which has escalated to Yemen and Saudi Arabia, will further restrict global energy supplies and push inflation higher.
The 10-year gilt yield gained as much as 0.03 percentage points to 5.39 per cent on Thursday, the highest since 2007, before falling back.
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