Inflation ‘comfortably’ above 5% next spring as energy bill hikes bite says BoE rate-setter

Inflation looks set to “comfortably exceed 5%” next spring as a likely energy bill hike for millions of households takes effect, the Bank of England’s deputy governor has said.

Ben Broadbent made the remarks amid questions about whether the Bank may act soon to tackle rising prices with an interest rate hike – or be held back by fears of an Omicron hit to the economy.

Household budgets are already being squeezed by the highest rate of inflation in a decade – reaching 4.2% in October thanks to soaring energy bills and fuel prices – and the Bank said in November that it expected this to hit around 5% in the spring.

Mr Broadbent’s comments in a speech at Leeds University Business School appear to suggest an upgrade on that forecast.

He said: “The aggregate rate of inflation is likely to rise further over the next few months and the chances are that it will comfortably exceed 5% when the Ofgem cap on retail energy prices is next adjusted, in April.”

That appears to suggest consumer price index (CPI) inflation might equal or even exceed the 5.2% level it reached in September 2011. It has not topped that since the 1990s.

The comments also underscore expectations that the recent surge in wholesale gas prices will mean another sharp increase early next year in the cap on standard energy tariffs set by Ofgem.

Ofgem, the energy regulator, adjusts the cap every six months to ensure suppliers can sell gas and electricity at a price that is both fair to consumers and allows them to operate without losing money.

It is expected that the increase in wholesale energy prices to near-record levels means the cap will inevitably increase, meaning higher bills for millions of homes.

The comments on inflation by Mr Broadbent, a member of the Bank’s rate-setting monetary policy committee (MPC), lifted the pound by about half a cent to just under $1.33 against the US dollar.

His remarks that a rate hike “could never have done anything” about the factors driving price growth higher now seemed to downplay the notion of an imminent increase.

However he did indicate that the Bank was paying close attention to the “tightening” labour market – that is, one where it is more difficult for employers to hire – as “likely to be a more persistent source of inflation”.

Mr Broadbent’s speech comes days after fellow MPC member Michael Saunders, who voted – against the majority – for a rate hike in November, said he wanted more information about the impact of Omicron when voting this month.

The Bank will hold a rate-setting meeting on 16 December.

Jane Foley, head of FX strategy at Rabobank, said after Mr Broadbent’s speech: “This re-focuses attention on the possibility of rate hikes from the Bank, though the market is far from convinced about a move next week.”