Ramsden: sustained energy costs could justify BoE rate increase

Bank of England Deputy Governor Ramsden adopted a cautious approach to policy, stating that additional quantitative easing is not likely in the near future and emphasising that the inflation outlook has become more skewed to the upside.

Last week, the BoE left the Bank Rate at 3.75% by a 6–3 vote, with three members favouring a 25-basis-point rise. The MPC noted the sharp increase in energy prices driven by the prolonged Middle East conflict and warned that if current energy costs persist, inflation could reach around 3.75% in Q4 2026 and just above 4% in Q1 2027. The central bank also stated that the longer elevated energy prices endure, the higher the risk of second-round effects through wages and prices.

Ramsden's attention is on the energy shock and its potential knock-on effects. He reported monitoring external pressures from energy costs, weather and supply chains, while domestically he is watching food prices and wage settlements for signs that the initial energy shock is becoming entrenched. He also noted that there is little evidence of significant second-round effects so far, and that food-price inflation has been weaker than anticipated.

He is not yet calling for tighter policy. Ramsden has historically been among the more dovish MPC members, so his restrained comments are not surprising.

Ramsden said the current stance remains restrictive, but if upside inflation pressures continue to build, there could be a case for raising the Bank Rate. This is broadly in line with the latest MPC communication, which held rates steady while acknowledging that the balance of risks has tilted further toward inflation.

Financial markets are pricing in roughly an 85% probability of a BoE increase at the next meeting. The immediate question is less whether the risk exists and more whether the energy shock becomes persistent enough to generate the second-round effects policymakers are monitoring, potentially leading to more rate hikes than currently expected.

Going forward, continued high oil and gas prices would keep the BoE on a tightening bias, while a meaningful easing in the Middle East situation should reduce the pressure on the central bank.