After several predictions during the summer of low interest rates in the UK for a long time, an economist has come out with a forecast that the Bank Rate will rise to 8% by 2012, if inflation gets out of control.
Andrew Lilico, chief economist at the Policy Exchange, has said that the Bank of England may be forced into dramatically increasing the Bank Rate due to rapidly rising inflation.
His research note also says that the UK is likely to suffer from a double dip recession, followed by a boom, driven by huge monetary growth.
The forecast of excessive price inflation, which would need to be brought under control with much higher interest rates, is based on the fact that the Bank of England has already pumped £200bn into the economy in the form of Quantitative Easing (QE).
The impact of higher inflation, and higher interest rates, increasing mortgage repayments will then (initially) push inflation up even higher. Dr Lilico is predicting inflation at around 10%.
He is sensible enough to point out that, unless households take action now to significantly reduce their debts, interest rates at 8% could result in mass mortgage defaults. This could prompt policy makers to keep interest rates lower for longer, and then inflation could hit 20% as it did in the 1970s.
So, how much attention should borrowers and savers pay to these interest rate predictions?
His predictions seem to go against the consensus opinion of other economists. Whilst there remains a great deal of uncertainty about the future direction of the UK economy, the balance of probabilities point to us avoiding a double-dip recession, inflation remaining slightly higher than the government target for a while and interest rates remaining very low.
The predictions from Andrew Lilico are based on a number of factors and forecasts all converging to create a ‘perfect storm’ for interest rates.
Whilst we feel it is extremely unlikely that interest rates will reach these sorts of levels by 2012, borrowers should take note of his sensible advice to reduce household debt whilst rates remain low.
