The outlook for inflation − speech by Clare Lombardelli

Lombardelli, the Deputy Governor for Monetary Policy, uses this speech to deliver a hawkish nudge, not a market-moving surprise. She flags near-term CPI revised up to around 3.7% in 2026 Q4 and 4.2% in 2027 Q1 (against 3.1% now), says energy prices have tracked the adverse scenario, and concludes policy is increasingly likely to need to tighten if elevated energy prices persist. The counterweight is that second-round effects still look like the central case, so she stops short of calling for a move now. Framing, channels and scenarios are already known from July; the delta is one senior member's personal hardening.

What’s new: The four-channel framework, the July scenarios and the Bernanke-Blanchard calibration are all recycled from the July Monetary Policy Report and priced. Genuinely new: Lombardelli's own update that she now assigns higher weight to the adverse energy scenario than in July, and her explicit line that policy is increasingly likely to need to tighten if high energy prices persist. The revised near-term CPI path (3.7% in 2026 Q4, 4.2% in 2027 Q1, ~4.5% ex-Budget/VAT measures) is new arithmetic. She states the shift does not make tightening a foregone conclusion because second-round effects still resemble the central case.

KEY FINDINGS

• Lombardelli: "policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity." An explicit tightening bias from a rate-setting Deputy Governor pushes front-end yields and near-term hike pricing higher.
• Near-term inflation forecast revised up: CPI rising from 3.1% to around 3.7% in 2026 Q4 and around 4.2% in 2027 Q1, materially higher than July, and closer to 4.5% for Q1 2027 without Budget measures and the electricity VAT cut. A materially higher near-term inflation profile keeps the market's upside risk skew to Bank Rate intact.
• She shifts her own scenario weighting: "So I now put higher weight on us being closer to the adverse scenario for energy prices than I did in July," though the stronger second-round treatment still looks less likely than the central case. The hawkish energy-price leg is strengthened while the persistence leg is capped, so the signal is a bias, not a full adverse-scenario call.
• On the Committee balance: "To date, a majority of the MPC have not judged that an increase in Bank Rate is needed but, as outlined in the September minutes, have noted that the inflation risks are currently to the upside and waiting for evidence had limits." Confirms the majority still on hold but with a hawkish tilt, flagging that the patience argument is weakening.
• Financial conditions already restrictive: Bank Rate 3.75%, and quoted two-year fixed-rate mortgage rates more than one percentage point higher than pre-conflict. Lets her argue passive tightening is already doing work, tempering the case for an imminent hike.

FROM THE DOCUMENT

On that basis, policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity.

So I now put higher weight on us being closer to the adverse scenario for energy prices than I did in July.

To date, a majority of the MPC have not judged that an increase in Bank Rate is needed but, as outlined in the September minutes, have noted that the inflation risks are currently to the upside and waiting for evidence had limits.

The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response.