A Bank of England rate hike moved closer on Wednesday as two members of the Monetary Policy Committee (MPC) said the case for tightening was building, even as the nine-member body voted six to three to hold rates at 3.75 per cent at its most recent meeting. The backdrop is a sharp rise in energy costs linked to Iran’s choking off of Gulf oil supplies, a development that has upended what had been a sustained easing cycle.
Deputy governor Clare Lombardelli, speaking at an event in Warsaw, said higher energy prices made it ‘increasingly likely’ that monetary policy would need to be tightened. She backed the consensus vote to hold, but her remarks left little doubt about the direction of travel. ‘Policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity,’ she said. ‘But this is by no means suggesting that monetary policy should respond mechanically to movements in energy prices.’
Two deputy governors signal a Bank of England rate hike may be near
Lombardelli, described in the report as a hawkish member of the committee, said it was ‘too soon to tell’ whether the spike in energy costs had become embedded in UK wage settlements and price-setting. She did, however, say the risk that energy costs would push prices higher in the coming months was ‘greater’, and that the energy price trajectory was heading towards an ‘adverse scenario’ outlined by the Bank’s own forecasters. Whether firms would respond by raising prices remained less clear, she added.
At a separate event in London, fellow deputy governor Sarah Breeden struck a similar tone. Breeden, who also sits on the MPC, said the ‘balance of risks had shifted’ and that the committee could not wait for ‘conclusive evidence’ before acting. ‘As risks crystallise, it’s increasingly appropriate for Bank Rate to respond,’ she said. ‘Every single member of the policy committee I think will have a different point at which they will flip, three have kind of decided already they’ve seen enough evidence.’
Those three are Huw Pill, Megan Greene and Catherine Mann, who all voted for an immediate increase. The majority, including Lombardelli and Breeden, held back.
The inflation picture underpinning those concerns is straightforward enough. Price growth edged up to 3.1 per cent in the year to August, and the MPC believes it could top four per cent in the early months of 2027 if energy costs stay elevated. Energy purchases accounted for about 8 per cent of household spending in 2024 on average, according to the Bank of England, which means sustained price rises at the pump and on bills feed through to consumer budgets with some speed.
A dramatic reversal of the easing cycle
The debate marks a sharp reversal of recent policy direction. According to The Guardian, the Bank had cut rates six times since mid-2024 and was expected to continue doing so, before Trump’s Operation Epic Fury led to Iran choking off oil supplies from the Gulf. That sequence of cuts had brought borrowing costs down to their current level after the previous tightening cycle, which saw rates rise from 0.1 per cent in December 2021 to 5.25 per cent in August 2023, as recorded by the House of Commons Library.
Beyond the rate decision itself, the MPC also unanimously agreed to reduce its stock of government bond purchases to zero through a multi-year programme, unwinding holdings at an average annual pace of £46 billion through 2034, according to Trading Economics. That quantitative tightening continues regardless of where Bank Rate heads next.
Not every rate-setter shares the urgency. Swati Dhingra said the Bank would still need to see further evidence before moving. She pointed to the coming winter months as the key test, arguing that pay settlements and energy price movements over that period would clarify whether a Bank of England rate hike was truly warranted. ‘We’re going to know over the winter energy prices what happens there, we’re going to know much more about pay settlements and where they end up at,’ she said. Dhingra also noted that ‘financial tightening is already under way’ and that current price rises were ‘very, very specific increases in consumer prices’ rather than the broad-based spread seen during the 2022 war.
The Organisation for Economic Co-operation and Development added its own note of caution on Wednesday, suggesting the Bank would not need to raise rates to keep higher inflation at bay. The MPC’s winter data on energy and wages will determine which view prevails.
