Lombardelli warns persistent energy costs may force rate increases
Bank of England Deputy Governor Clare Lombardelli stated that monetary policy is increasingly likely to need to tighten if elevated energy prices persist. Speaking in Poland on September 24, she noted that UK inflation is projected to reach 4.2 percent in early 2027.
Energy shock pushes inflation toward 4.2 percent
The Middle East conflict has driven sharp increases in global commodity markets, pushing Brent crude up 26 percent to 98 dollars per barrel and natural gas prices up 50 percent.
In the United Kingdom, petrol has risen to 172 pence per litre, while the energy price cap will lift average annual household bills to 1,723 pounds in October and over 2,000 pounds in early 2027.
Consequently, the Bank of England projects consumer price inflation to increase from 3.1 percent to 3.7 percent in the fourth quarter of 2026 and 4.2 percent in the first quarter of 2027.
Domestic wage settlements have moderated to 3.6 percent in 2026 from 4.0 percent in 2025, but underlying disinflation faces headwinds.
Corporate margins delay the transmission
Bank Rate remains at 3.75 percent following 150 basis points of reductions prior to the conflict.
While direct energy costs passed through rapidly, indirect effects have been delayed as companies temporarily absorb expenses in profit margins.
Food inflation stands at a two-year low of 1.3 percent, though staff project it to reach 4.0 percent by early 2027.
Lombardelli emphasized that monetary policy must look through direct energy costs but respond firmly if persistent inflation triggers second-round wage increases.
Corporate buffers buy borrowed time
Lombardelli rightly warns that corporate margin absorption cannot delay monetary tightening indefinitely.
Relying on sluggish second-round effects while inflation tops 4 percent exposes the central bank to severe credibility risks.
A return to rate increases will become inevitable if commodity pressures fail to recede.