Lombardelli Says BoE May Need More Rate Hikes, Warns Inflation Risks Skew Up

Lombardelli, the Bank of England's Deputy Governor for Monetary Policy, said Tuesday that "there is likely to be a case" for further interest rate hikes in the near term. The balance of risks to inflation still leans to the upside, she argued, pointing to an energy shock that is bigger and lasting longer than predicted, activity that remains resilient, and an underlying disinflation process that appears to be stalling. She made clear any decision will hinge on "how the combination of data on pricing, activity and slack come together alongside energy and related prices," and flagged "considerable uncertainty" around the outlook.

Rather than trying to sketch out every move needed to drag inflation back to the 2% target, Lombardelli repeated her call for gradual adjustments to monetary policy.

That stance follows the Bank's November 5 decision to raise its benchmark interest rate by 25 basis points, the first hike since August 2023 and one that leaves the rate at 4%. Eight Monetary Policy Committee members backed the move, while one pushed for a larger 50 basis point increase. The committee tied the decision to the ongoing conflict in the Middle East and its effect on prices.

Governor Andrew Bailey said the same day that "today's hike does not seem likely to be the last increase," warning more tightening may be needed unless the Middle East conflict is resolved. He also said the Bank would have raised rates even if policymakers had known about the latest developments in the region, citing inflationary pressures already building in the economy, and pointed to the drop in oil prices over the previous 48 hours as a sign of market volatility. He stopped short of committing to any monetary path without a clear resolution of the Iran war.

Fellow MPC member Megan Greene said risks of second-round effects are "greater than we thought." In a speech, she laid out two scenarios: leaning against those effects by hiking and later adjusting policy if the move proves unnecessary, or being too sanguine and having to course correct later.