Rising gas and electricity bills to push inflation over 5% next year, says BoE deputy governor

‘When the next rise in the Ofgem cap on gas and electricity bills comes through, it will probably climb comfortably through 5%, a long way north of the MPC’s 2% target,’ said BoE deputy governor Ben Broadbent. Photo: Getty

Bank of England (BoE) deputy governor Ben Broadbent has warned that UK inflation could “comfortably” be more than 5% next spring thanks to rising retail energy prices and supply chain pressures.

In a speech at Leeds University Business School on Monday, he said the inflation hike will come as regulator Ofgem is likely to raise the UK’s price cap in April 2022.

“Despite relatively weak growth over the past two years as a whole, domestically and globally, inflation has risen very significantly. In this country it was over 4% in October.

“In the spring of next year, when the next rise in the Ofgem cap on gas and electricity bills comes through, it will probably climb comfortably through 5%, a long way north of the MPC’s 2% target.”

UK inflation stood at 4.2% in October, soaring to its highest level in 10 years thanks to a rise in fuel and household energy costs. This is more than double the Bank’s 2% target.

Watch: What is inflation and why is it important?

He called the current economic situation an “extremely challenging period for monetary policy”, and that transitory inflation should be understood as referring to the next 18 months to 2 years.

Broadbent added that the rising prices of goods, due to ongoing supply chain issues, have also pushed inflation over target, although this is likely to subside rather than intensify, he said.

He added that the tight labour market will add fuel to inflation, stoking expectations of an interest rate hike on 16 December.

Pointing to the new Omicron variant of COVID-19 on Monday, the economist said he was unsure how the strain would affect his vote on UK interest rates next week.

“I go into these meetings not knowing very often what I’m going to vote myself,” he said. “I think the best way to look at it is to look at our last set of forecasts, think about the economics of this, and think about the data we’ve had since then.”

Read more: Bank of England holds interest rates at all-time low of 0.1%

In November, Broadbent was one of 7 MPC members who voted to leave interest rates at record lows of 0.1%, despite widespread anticipation it would increase.

The UK's main interest rate has been at an all-time low of 0.1% since the pandemic began, having been set at 0.75% pre-pandemic. A rise to 0.25% would have been the second lowest rate the bank has ever set.

His words echo that of policymaker Michael Saunders who on Friday said it was best to wait for more information on the Omicron strain before making a decision on interest rates. Saunders, however, is one of the more hawkish officials, who voted for an interest rate hike last month.

Markets now broadly expect the BoE to keep interest rates unchanged as the new variant spreads across the world. The currency market position implies around a 30% chance of an increase, having been as high as 60% previously.

Watch: Will interest rates stay low forever?

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