Interest rates could rise to 8% by 2012
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The Policy Exchange has warned that interest rates could rise to 8 per cent by 2012 if inflation spirals out of control.
The think tank’s chief economist Andrew Lilico says the Bank of England may be forced to dramatically increase the base rate due to rapidly rising inflation.
This is in stark contrast with Ernst & Young’s economic forecast, published last month, which suggested that the base rate will remain at the historic low of 0.5 per cent until the end of 2013.
Lilico warns the UK is likely to suffer from a double dip recession, but he believes this will be followed by a boom leading to the strongest economic growth since the 1980s.
Lilico says: “Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation.”
He warns that the £200bn the BoE has injected into the economy through quantitative easing has quadrupled the money base. He says once the economy starts growing again, lending will expand and there will be “too much money chasing too few goods”.
Lilico says this will trigger a rise in inflation and interest rates. He says: “Since interest rate rises will raise mortgage rates, the initial effect will be even more inflation.”
He expects inflation to rise to around 10 per cent and he predicts that this, in conjunction with a rise in interest rates, could cause another recession in 2013 or 2014.
Lilico adds that if households do not reduce their debts between now and 2012, interest rate hikes to 8 per cent would lead to mass mortgage defaults.
He said: “If that is the case, then interest rates may have to be kept lower for an additional nine months and the consequence will be inflation peaking at 20 per cent rather than 10 per cent.”
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Readers' comments (14)
John Thomas | 23 Aug 2010 9:24 am
Or the MPC could have the good sense to reduce the money supply again. I don't think QE was intended to run ad nauseum.
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Dale Tranter | 23 Aug 2010 9:28 am
hmm..group hardly anyone has heard of says something controversial to get itself noticed....and succeeds admirably.
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Anonymous | 23 Aug 2010 9:49 am
A lovely piece of scaremongering to start off the week. Honestly these spin doctors....
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Anonymous | 23 Aug 2010 9:51 am
Let's hope this is just scaremongering. If he is correct then the whole country will be bankrupt & repossessions will go through the roof. We are not yet out of the woods from the first recession & times remain very challenging.
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Steve Laird | 23 Aug 2010 10:00 am
You pays your money, you choose your 'expert'! Further proof, as if any was needed, that no-one has a clue what's going to happen next.
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Danny Lovey | 23 Aug 2010 10:10 am
What a complete lot of tosh!!!
The banks have around £800 billion to refinance including paying back what they owe to the BOE - The QE programme was a one off that can be(and should) be reversed at some stage.
We are in for a tough time fiscally and raising rates would be completely counter productive to head off 'imported' inflation that the BOE can do nothing about.
To suggest that inflation would be created by too much money chasing to few goods is a pipe dream over the next 2-5 years. The interest rate tool has always been a blunt weapon and would damage growth prospects for industry.
The 'think tank' should either stop thinking or just give up and get a life!
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John Whipple | 23 Aug 2010 10:14 am
Most of the QE money is not in the UK economy. In fact hardly any of it is.
This why even Mr. King is "broken hearted" about the way banks are treating their commercial customers. And why we have seen lending to SMEs "plummet" unlike German Banks who have and are supporting German industry - The French by the way never really changed their lending policies.
As to interest rates the UK cannot afford even 3% at the current level of debt so for rates to move above that level something really, really bad has to happen.
But that is not to say interest rates shouldn't go up very slowly to 3% over the next 2 years.
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Gary Festa | 23 Aug 2010 11:09 am
What a lot of nonsense! Reads like a daily Daily Mail story.
However if its not, "Will the last one to leave the country please turn off......" (you know the rest)
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Blair Cann | 23 Aug 2010 12:19 pm
For a while there I thought I might be in the minority in rolling my eyes heavenwards after reading this. Still, on reflection I am spiking my stories about the plague of locusts in 2011 and the smiting of the first born shortly afterwards. Clearly none of you lot would believe it...
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John Clarke | 23 Aug 2010 3:18 pm
Would Mr Lilico care to explain the transmission mechanism from the "quadrupling of the monetary base" to the economy and then inflation? Why are variations in the notes and coin plus commercial banks' reserves held at the Bank of England the key for determining where the UK economy goes? QE has in fact boosted the much more important measure of M4X, but this is still only up 1.2% on year ago levels.
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