Friday, June 10 2022

LONDON, May 11 (Reuters) – The Bank of England is likely to have to raise interest rates much more sharply than financial markets expect to rein in soaring inflation, former politicians said on Wednesday.

The BoE’s Monetary Policy Committee (MPC) has raised its key rate four times since December to 1% – the highest level since 2009 – but still expects inflation to top 10% by the end of December. end of this year.

“In my opinion, the nominal interest rate – the short-term interest rate controlled by the MPC – will have to rise by at least 250 to 300 basis points from here,” said Adam Posen, who sat on the MPC from 2009 to 2012. UK Parliament Treasury Committee.

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That would mean an interest rate of 3.5% to 4% – well above the 2.5% peak predicted by financial markets for June 2023.

Posen, who is now the president of the Peterson Institute for International Economics in Washington, said unemployment needed to rise – effectively requiring a recession – for inflation to return quickly to the BoE’s 2% target.

Last month, the International Monetary Fund predicted that Britain will see weaker growth and higher inflation than any other major advanced economy next year.

As countries around the world suffer from soaring energy prices and supply chain bottlenecks, exacerbated by Russia’s invasion of Ukraine, Posen said additional inflation in Britain seemed to be mainly due to Brexit.

The BoE’s own forecast implies that interest rates could rise less than expected by the markets, as it expects inflation to be significantly below its 2% target in three years’ time if interest rates follow the path expected by the markets. Annual consumer price inflation in Britain hit 7.0% in March, its highest level in 30 years.

Current MPC members generally do not speak directly about the potential rise in interest rates.

Kristin Forbes, a professor at the Massachusetts Institute of Technology who served on the MPC from 2014 to 2017, told lawmakers she was concerned the BoE hadn’t been clear enough about how big any rate hikes might come.

“Anyone buying a house or who might have a variable interest rate on a credit card should be aware that rates can go up to the 3% type level that Adam mentioned,” she said.

Charles Goodhart, who sat on the BoE’s first MPC after independence in 1997 and taught at the London School of Economics, speculated that rates might need to go even higher.

“It will take nominal interest rates well above 4% to start having a significant effect on the housing market, and I bet we will go above 5%,” Goodhart said during the parliamentary hearing. on inflation and economic policy.

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Reporting by David Milliken Editing by Paul Simao

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