UK interest rates could rise again soon if inflation does not fall back, according to Bank of England deputy governor Clare Lombardelli. The policymaker warned in a speech that there is a risk inflation will climb higher than expected as the Iran war pushes up energy costs, potentially requiring additional rate increases to control price pressures. The Bank's monetary policy committee raised rates from 3.75% to 4% last week, the first increase for more than three years, and forecasts inflation will jump to around 5% in the second quarter of 2027, compared with 3.5% currently.
Lombardelli said she continues to believe there is likely to be a case for a further rate increase in the near term, particularly given that underlying disinflation appears to have stalled. Speaking at the Bank of England Watchers Conference, she noted that the energy shock has lasted longer and become larger than expected, while economic activity has remained more resilient than anticipated. She stressed that the impact goes beyond direct energy costs and feeds through to price and wage setting across the wider economy.
Governor Andrew Bailey said further rate increases were likely if the war is not resolved, though he did not specify when they might happen. Lombardelli cautioned the Bank should raise rates gradually rather than trying to anticipate the full policy adjustment needed immediately. She also highlighted concerns about the labour market, saying the challenge extends beyond keeping unemployment low to helping people move into available jobs and ensuring wage pressures genuinely ease.
Most economists are predicting another rate rise in February, while some think a further cut could come as soon as December. The timing remains highly uncertain and dependent on progress in talks to end the Iran war. Oil prices have already dropped below 90 dollars a barrel on Thursday amid hopes of a resolution.
For UK savers, borrowers and businesses, further rate increases in the coming months would mean higher mortgage costs and borrowing expenses, while deposit rates could offer better returns, depending on how the conflict and inflation develop.