Interest rates: why the Bank of England is watching energy prices closely

Petrol is currently sitting at an average of 172p a litre. Energy bills are heading past £2,000 a year. And the Bank of England warning that interest rates may need to rise again.

That was the message from Clare Lombardelli, the Bank of England’s Deputy Governor for Monetary Policy, speaking this week at the Sixth Biennial Conference on Macroeconomic Policy in Warsaw. Her speech set out why the ongoing conflict in the Middle East is pushing up UK inflation, and what it could mean for household finances and mortgage rates in the months ahead.

Here’s our take on what she said, and what it means for you.

Energy prices are driving inflation, again

Since conflict broke out in the Middle East, oil prices have swung wildly, from around $70 to over $110 a barrel. They’re currently sitting around $98, roughly a quarter higher than just a few weeks ago. Gas prices have jumped by about half in the same period.

The knock-on effect is already visible at the pump and on energy bills. Petrol has risen from around 132p to 172p a litre since February. Ofgem’s energy price cap goes up almost 4% in October, taking the average household bill to £1,723, with a further rise towards £2,000 expected early next year.

The Bank now expects inflation to climb from its current 3.1% to around 3.7% by the end of the year, and to about 4.2% in early 2027.

Why this matters for interest rates

The Bank’s job isn’t to control oil and gas prices directly. It’s to stop a temporary price shock from turning into something more permanent, where higher energy costs feed into wages, business prices and household expectations more broadly, a process economists call “second-round effects”.

So far, the evidence is mixed. Businesses have absorbed higher energy costs better than expected, and wage growth has actually been slowing. But Lombardelli was clear that this could change the longer energy prices stay high. As she put it, the longer higher prices persist, the greater the risk that they start feeding through into wages and everyday prices.

Her conclusion: if energy prices remain elevated, interest rates are increasingly likely to need to rise, unless there’s clear evidence the economy is weakening or inflation easing elsewhere.

What this could mean for you

This isn’t a guaranteed rate rise, and the Bank has been careful to stress that its response depends on how things develop over the coming months. But borrowers and savers should be paying attention.

• Mortgage holders: rates on two-year fixed deals are already over a percentage point higher than before the conflict began. If you’re coming up to a renewal, it’s worth reviewing your options sooner rather than later.
• Households: with energy bills set to rise again in October and food price inflation expected to pick up too, budgeting for higher costs into 2027 is sensible.
• Savers: if rates do rise, it could be good news for savings accounts, though the picture will depend on how the Bank balances inflation risks against the wider economy.

If you’d like to understand what this could mean for your mortgage, savings or wider financial plans, get in touch with the team at KGJ Insurance. We’re here to help you make sense of it. Contact us on 01384 390 909 or book a free online consultation on our website now.

This is our interpretation of a speech by Clare Lombardelli, Deputy Governor for Monetary Policy at the Bank of England, delivered on 24 September 2026 at the Sixth Biennial Conference on Macroeconomic Policy, Warsaw. Read the full speech at bankofengland.co.uk.