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Newsflash: A Bank of England deputy governor is warning that interest rates will be raised, if necessary, to combat the risk of persistent inflationary pressures from higher oil prices.
Clare Lombardelli is telling the Sixth Biennial Conference on Macroeconomic Policy in Warsaw that the energy shock due to the conflict in the Middle East is likely to keep pushing UK inflation higher in the coming months.
Strong demand for AI components is already pushing up global export prices and weather-related shocks add upside risks. On the other hand, trade diversion is reducing inflation.
The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response.
On that basis, policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity. But this is by no means suggesting that monetary policy should respond mechanically to movements in energy prices. The key issue is not the spot price of energy itself but the interaction of the underlying economy, higher energy prices, and the nature of their transmission. That, ultimately, is what will determine whether Bank Rate needs to rise. Continue reading…
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