Sept 24 (Reuters) – Bank of England Deputy Governor Clare Lombardelli said on Thursday that interest rates will likely have to rise if energy prices stay elevated, unless there is clear evidence of a weaker economy.
Lombardelli, deputy governor in charge of monetary policy, last week said the case for an increase in interest rates was building, as she voted with a 6-3 majority in favour of holding them at 3.75%.
“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,” Lombardelli said in a speech given at the Sixth Biennial Conference on Macroeconomic Policy, Warsaw.
“On that basis, policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity.”
Lombardelli added that she was not saying monetary policy should react mechanically to energy prices but instead counter the risk that they start to feed through into inflation expectations, wage bargaining and price-setting.
“The key issue is not the spot price of energy itself but the interaction of the underlying economy, higher energy prices, and the nature of their transmission. That, ultimately, is what will determine whether Bank Rate needs to rise,” Lombardelli said.
She said monetary policy and financial conditions remained restrictive but pointed to the risk that food inflation — which has undercut the BoE’s expectations — could still pick up and then raise pressure on wage-setting.
Lombardelli said wage growth of around 3.25% could be consistent with the 2% inflation target in the long run — assuming 1% productivity growth and normal import price inflation — but that might not be the case if energy prices keep pushing up import costs.
BoE Governor Andrew Bailey and deputy governors Sarah Breeden and Dave Ramsden also raised the prospect of raising interest rates at last week’s meeting. Bailey said there was no “firm judgement” on what will happen to rates.
Financial markets on Thursday pointed to a roughly 75% chance that the BoE will hike interest rates by a quarter point at its next meeting in November.
(Reporting by Andy Bruce; Editing by Alexandra Hudson)
