In a bid to curb stubbornly high inflation, the Bank of England could potentially raise the UK base rate as high as 7%, warns US investment bank JP Morgan. This prediction comes alongside rising concerns about a hard landing for the UK economy.
JP Morgan forecasts that rates could peak at 5.75% by November, but under certain scenarios, they could further increase to reach an unprecedented 7%. This analysis by JP Morgan Economist Allan Monks follows just two weeks after the base rate was increased by 0.5% to 5%, a measure taken to control inflation. This hike has left many homeowners grappling with escalating loan repayments.
According to the Organisation for Economic Co-operation and Development, the UK is the only G7 nation currently experiencing rising inflation.
JP Morgan has sounded the alarm that escalating borrowing costs could potentially undermine business confidence and lead to an increase in unemployment. Further, the National Institute of Economic and Social Research predicted last month that higher mortgage payments could result in approximately 1.2 million households becoming insolvent this year.
Monks cautioned that “high inflation could prompt a broader rise in inflation expectations as psychology shifts and a sustained wage-price spiral sets in.” He added, “Even if longer-term measures remain anchored, elevated short-term expectations could also create a more persistent problem. This could force the BOE into raising rates above our forecast in order to ensure real rates turn sufficiently positive to short circuit this dynamic.”
In an interview with the BBC, Bank of England governor Andrew Bailey acknowledged the strain on households, admitting that people were “having to make very difficult choices” regarding their financial decisions. He warned, “If we don’t get inflation down, if it keeps going on, it gets worse, it really gets worse, and we’ll have to put interest rates up more.”