UK: Sky-high oil prices signal higher rates

Rocketing global oil prices could force the Bank of England to keep interest rates higher for longer to stamp out fears of spiralling inflation, analysts have warned.

After supply cuts from producers’ cartel Opec, and predictions that global energy demand will remain strong, the cost of a barrel of Brent Crude rose by well over $1 on Friday, to close at $73.93, near the all-time highs of last summer.
With commodities experts predicting the market will remain tight for the rest of the year, Karen Ward, chief UK economist at HSBC, said oil price rises could add up to 0.5 per cent to the inflation rate over the coming months: and that would mean yet more rate increases.

‘Unless it’s very clear that consumers are reacting to higher rates and higher prices, then the Bank of England are going to take a hard line, and there will be more rate hikes on the back of it,’ she warned.

In the long term, sky-high oil costs tend to depress household spending, slamming the brakes on economic growth; but first, they push up inflation. With the Bank keen to signal that it will keep a lid on rising prices, after inflation shot up to 3.1 per cent earlier this year, David Brown, chief European economist at Bear Stearns, agreed that hawkish rate-setters could now keep borrowing costs higher, for longer.

Guardian