Stubborn UK inflation may lead to 7% interest rates, economists warn

Stubborn UK inflation may lead to 7% interest rates, economists warn

6 Jul    Finance News, News

The Bank of England may need to push interest rates to as high as 7% to tackle stubbornly high inflation, economists have warned, amid fears the soaring cost of borrowing could drive the economy into recession.

With households under growing pressure from rising mortgage costs, the US investment bank JP Morgan said there was a risk that persistent inflationary pressures could lead the central bank to raise interest rates by more than expected.

It comes as mortgage lenders have been increasing rates and withdrawing cheaper deals after the Bank raised interest rates by a half point to 5% last month, with the UK struggling to bring down the highest inflation rate in the G7.

Financial markets expect the Bank to increase its base rate above 6% before Christmas. JP Morgan said its central forecast was for rates to peak at a lower level of 5.75% by November, but warned rates could go higher, possibly to 7% under “some scenarios”.

The US bank said there were heightened risks of a “hard landing” for the British economy next year, from the impact of surging borrowing costs hitting business confidence and driving up unemployment.

The prospect of the Bank engineering the conditions for a recession to tackle stubbornly high inflation comes as figures suggest the UK economy has performed more strongly than anticipated in recent months.

According to the latest monthly health check from S&P Global and the Chartered Institute of Procurement and Supply, companies reported a sustained upturn in the UK’s services sector in June, with job creation edging up to a nine-month high.

Economists have suggested that strength in the UK jobs market is adding to inflationary pressures, after figures showed annual growth in average workers’ pay rose to among the highest levels in two decades in April amid near-record job vacancies. However, other economists warn companies rebuilding profit margins after last year’s energy price shock are also contributing to the persistence of high inflation.

The former Bank of England deputy governor Charlie Bean said the central bank had been “too slow to wake up” to inflation risks in 2021 before its first interest rate hike. The Bank began raising interest rates in December 2021 from 0.1%, after crashing borrowing costs to the lowest level on record to support the economy during the Covid pandemic.

“They were certainly slow to wake up to the need to be withdrawing stimulus,” he told MPs on the House of Commons Treasury committee on Wednesday.

Bean said there was a “way to go” before inflationary pressures in the jobs market would fade, with employers pushing up wages to lure staff, and workers seeking larger pay rises to compensate for high inflation.

“It’s not necessarily an explosive process but it may take quite a long time to die away,” he said.

See also  Labour Abandons Pension Lifetime Cap Reinstatement in £800m U-turn

Leave a Reply

Your email address will not be published. Required fields are marked *