Bank of England Deputy Governor Clare Lombardelli warned that interest rates will probably need to rise if energy prices stay elevated, unless the economy shows clear signs of weakening. Her comments landed alongside a fresh sell-off in government bonds and rising odds of another Fed hike.
Bank of England Deputy Governor Clare Lombardelli said interest rates will likely have to rise if energy prices stay elevated, unless there is clear evidence of a weaker economy. She made the remarks in a speech at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw.
Lombardelli flags a tightening risk
According to Reuters: "policy is increasingly likely to need to tighten if elevated energy prices persist", Lombardelli said. She is one of six Bank policymakers who voted to hold rates last week, outvoting three colleagues who backed a rise.
Lombardelli noted that businesses have proved more resilient to higher energy costs than the Bank expected. But she said the longer prices remain high, the greater the risk of pass-through into wages and domestic prices. She added that she was not suggesting monetary policy should respond mechanically to energy prices, since what matters is how the wider economy absorbs the shock.
Gilts sell off as Fed odds rise
The warning came as UK borrowing costs edged higher, with 10-year gilt yields up 2 basis points to 5.34%, near a 19-year high set last week. Thirty-year gilt yields also rose 2 basis points, to 5.82%.
Meanwhile, US Treasuries sold off sharply after strong economic data, and futures now price a 71% chance of a Fed rate hike at its October meeting, according to Deutsche Bank strategist Jim Reid. The moves put the Bank of England and the Federal Reserve under parallel pressure to justify further interest rate increases this year.
Lombardelli added that significant uncertainty remains over how long the energy shock persists, leaving the size and timing of any Bank Rate move an open question.
Sources: Business | The Guardian, Economy News
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