UK interest rates could be hiked again in the near future if soaring inflation does not ease back, according to Bank of England deputy governor Clare Lombardelli.
The senior policymaker warned in a speech there is a risk that inflation will rise by more than feared as the Iran war sends costs surging, which would need further action on rates to cool inflationary pressures.
The Bank’s monetary policy committee voted to raise rates from 3.75% to 4% last week, marking the first increase for more than three years.
It forecast inflation jumping to around 5% in the second quarter of 2027, up from 3.5% currently.
Governor Andrew Bailey said further rate increases were likely if the war is not resolved, but did not give an indication of timing.
Ms Lombardelli said: “In the absence of evidence of weaker inflation pressures, I continue to think there is likely to be a case for a further increase in rates in the near term.”
In her speech at the Bank of England Watchers Conference, she added: “The balance of risks to inflation remains to the upside.
“The energy shock has lasted longer and become larger than expected, activity has been more resilient and recent data suggest that underlying disinflation may have stalled.”
She said: “This is not just about the conflict and its consequences for energy costs. But also how those feed through to price and wage setting more broadly across the economy.”
But she said the Bank should further increase rates “gradually” and not try to “anticipate today the full policy adjustment that will ultimately be needed to return inflation sustainably to target”.
Ms Lombardelli also stressed she would be looking carefully at the jobs market and factors affecting vacancies and youth unemployment.
She said: “Too many people are struggling to get in or move on. The challenge is not simply to keep unemployment low. It is to help the labour market shift up a gear.
“In setting monetary policy, I will continue to look beyond the headline numbers: at whether hiring is recovering, whether people can move towards the jobs available, and whether labour market weakness is genuinely easing wage and inflation pressures.”
Most economists are pencilling in another rate rise in February, while some believe a further cut could come as soon as December.
But the timing is unclear and seen as being very dependent on progress in talks to end the Iran war, with oil already having dropped below 90 dollars a barrel on Thursday on hopes over a resolution.
