Bank of England Governor Andrew Bailey strengthened his warning Friday that persistent high energy prices could make it increasingly difficult for policymakers to keep interest rates unchanged.
The comments reinforce a notable shift in the Monetary Policy Committee’s stance as officials assess whether the energy shock is becoming embedded in broader inflation expectations.
The Bank kept its benchmark rate at 3.75% last week in a 6-3 vote, but Bailey and other senior policymakers have raised the possibility that higher borrowing costs could eventually be required.
Deputy governors Sarah Breeden and Clare Lombardelli also indicated Thursday that they were moving closer to supporting an increase.
The Bank expects inflation to rise to slightly above 4% in early 2027, more than twice its 2% target.
Bailey said policymakers cannot necessarily wait for complete evidence of how energy prices are feeding through to inflation expectations before responding.
Financial markets have moved considerably further toward a tightening scenario. Investors on Friday were pricing approximately an 80% probability of a rate increase in November.
That represents a significant reversal from expectations before the Middle East conflict, when investors had anticipated additional monetary easing.
The critical question is whether higher energy costs generate persistent second-round inflation through wages, services and household expectations.
Upcoming inflation, wage and activity data will therefore carry unusual weight ahead of the November policy decision.
