Bank of England must raise interest rates to 2.5% next year to curb inflation, think tank says

A leading think tank says the Bank of England needs to raise interest rates to 2.5% and keep them at mid-century to rein in soaring inflation.

Bank of England Monetary Policy Committee Report Figures released last week suggested that a 2.5% rate would push inflation below its 2% target, largely implying that price stability would not need to be raised to that level.

But according to Stephen Millard, deputy director of the National Institute for Economic and Social Research think tank who made the forecast, the Bank of England may have overestimated the extent to which demand headwinds will dampen inflation.

“We expect inflation to fall quickly, as do banks, but rates are higher than the BoE’s forecast,” Millard told a news conference introducing the NIESR study.

Last week, after inflation hit a 30-year high of 7% in March, the bank announced a 0.25 percentage point increase in its base rate to 1%.

NIESR forecasts inflation to peak at 8.3%, below central bank expectations prophecy Prices will rise more than 10% this year.

Despite forecasting the need for higher interest rates to keep inflation in check, NIESR said the central bank would have to be careful in “allowing inflation expectations to anchor and . . . sink the economy into a deep recession”.

Millard conceded that the severe uncertainty facing the UK economy due to the impact of the war in Ukraine and the squeeze on lower real incomes made any assumptions about future growth less firm.

“Since we ended our forecast, our results point to a sharp drop in consumer confidence. This may be related to an increase in precautionary saving”, which could mean “consumption will not be as strong as we predicted”.

Millard cautioned that any projections to strengthen household consumption should not be seen as a sign that everyone will be able to weather the drop in income.

“While we expect overall consumption to rise as households draw on their pandemic savings, aggregates may mask what is happening at the disaggregated level,” he said.

Adrian Pabst, NIESR’s deputy director, added that the current real income crunch is hitting poorer households hardest. “As incomes fall, food and energy bills will eat up a lot of real disposable income,” he noted.

According to Pabst, about 1.5 million of the hardest hit households will face food and energy bills “higher than their disposable income.” Their plight requires the government to respond in the form of targeted financial assistance, he said.

He said a “universal credit boost of £25 a week for at least six months” and a “one-off £250 cash payment in 2022-23” to support “11.3 million struggling families” should be mentioned. on the agenda. to make a living”.

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