Interest rates expected to surge as high as two percent next year as inflation soars

Interest rates ‘need to rise and will rise’ says Andrew Bailey

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On Wednesday morning, the Office for National Statistics revealed inflation had risen to 4.2 percent, up from 3.1 percent last month, driven mainly by rising energy bills, fuel and food costs. Speaking to, former Bank of England rate setter Andrew Sentance said: “I’m expecting, over a period of time, possibly by the end of next year, interest rates to go up to one to two percent which probably creates a sort of shock horror feeling for some people but in fact it’s very low interest rates historically.” Mr Sentance, now senior adviser to Cambridge Econometrics, warned today’s figures were “not the peak”, adding that inflation would likely go as high as five or six percent next year. Grant Fitzener, chief economist at the ONS, said: “Inflation rose steeply in October to its highest rate in nearly a decade.”

“This was driven by increased household energy bills due to the price cap hike, a rise in the cost of second-hand cars and fuel as well as higher prices in restaurants and hotels.

“Costs of goods produced by factories and the price of raw materials have also risen substantially and are now at their highest rates for at least 10 years.”

The news will place increased pressure on the Bank of England which voted to hold interest rates at a rock bottom 0.1 percent earlier this month, despite widespread anticipation of a rise.

“I think there’s been some very inconsistent messaging from the Bank of England,” Mr Sentance suggested.

“I think they need to get their communication strategy sorted out and be much more consistent in warning people interest rates intend to go up and preparing the ground for that without causing too much alarm.”

So far, the Bank of England has faced concerns a rise in interest rates could damage the UK’s recovery as it emerges from the pandemic.

Suren Thiru, head of economics at the British Chambers of Commerce, warned: “The Bank of England is facing a tricky trade-off between surging inflation and a stalling recovery.

“However, with the UK economy facing mounting headwinds, raising interest rates too early should be resisted to avoid damaging business and consumer confidence.”

Think tank Resolution Foundation also warned this morning that global pressures on inflation would make it harder to deal with through central bank policy, pointing to low wage increases as the biggest problem.

Senior economist Jack Leslie said: “While painful for households, the fact is that the global nature of these inflationary pressures mean that traditional tools such as raising interest rates are likely to have little effect.

“Instead, we need to focus on securing the as yet incomplete Covid recovery so that stronger growth creates more scope for higher pay rises.”

Mr Sentance said there were some transitory elements to inflation which would wash out over time but pointed out the economy was now in a very different situation to previously predicted given the strength of the job market.

He added the economic impact of the pandemic had eased significantly and, if anything, the economy is now running “too hot”.

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Going forwarded, he predicts inflation will likely peak in the first half of next year but would not necessarily come down very quickly to the two percent target.

Rising inflation is likely to have a major squeeze on household finances with the Resolution Foundation noting it would mean pay packets shrinking in real terms for the third time in a decade.

Peter Tutton, head of policy at debt charity StepChange, told rising fuel bills would disproportionately hit vulnerable people and “wipe out some of the benefit” from measures such as the Warm Home Discount.

He also warned the squeeze on costs would lead to people “using credit to try to make ends meet” adding “that’s all the ingredients of a more severe debt problem building over the year.”

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