Bank of England (BoE) policymaker Megan Greene has put a potential interest rate hike firmly on the table for the upcoming June 18th meeting.
Her warning comes just after the UK's energy regulator, Ofgem, announced a significant 13% increase in the household energy price cap, starting this July. This directly impacts household bills and raises concerns that inflation, which had been cooling, could heat up again. Greene's message was a clear 'if-then' statement: if this energy price shock leads to broader price and wage increases, then rates would need to rise.
This situation didn't happen overnight, though. The primary driver is the external energy shock from the Iran conflict earlier in the year, which caused Brent crude oil prices to surge. In May, average oil prices were still over 60% higher than in January, keeping costs high for businesses and consumers. This is what economists call a first-round effect – a direct price increase from a specific source.
What the BoE is truly worried about are the 'second-round effects'. This is when the initial energy price hike starts a chain reaction. First, businesses facing higher energy and transport costs pass them on to consumers by raising the prices of their goods and services. We're already seeing signs of this; recent surveys like the S&P Global PMI show service sector prices rising at the fastest pace in three years. Second, workers, seeing their living costs go up, demand higher wages to compensate. If companies agree and then raise prices further to cover the higher wage costs, it can create a difficult-to-stop wage-price spiral.
This puts the BoE's Monetary Policy Committee (MPC) in a tough spot. April's inflation data actually looked promising, thanks to temporary government support and a previous price cap cut. However, the MPC knows this relief is short-lived. Now, they face a classic central bank trade-off: raise interest rates pre-emptively to stop inflation from becoming entrenched, but risk slowing down an already weak economy? Or wait for more data, but risk letting inflation get out of control? Policymakers are openly split, but Greene’s speech has tipped the scales, signaling that the risk of persistent inflation is being taken very seriously ahead of the June decision.
- Glossary
- Ofgem price cap: A limit set by the UK's energy regulator on the maximum amount suppliers can charge customers for average energy use. It is reviewed periodically.
- Second-round effects: An economic chain reaction where an initial price shock (e.g., higher oil prices) leads to broader increases in wages and other prices, making inflation more persistent.
- Monetary Policy Committee (MPC): The group within the Bank of England responsible for setting the UK's main interest rate.