JPMorgan has warned of a major risk the Bank of England may have to hike interest rates as high as seven percent to deal with inflation, and trigger a “hard landing” to sort out Britain’s economy.
Economist Allan Monks wrote a note to clients that a hard landing – a marked economic slowdown or sharp downturn – “looks increasingly likely”.
Mr Monks also suggests some metrics suggest the Bank’s base rate will have to rise a further two percentage points from its current five percent to bring inflation under control.
Fears of an impending recession will not be alleviated by today’s report from the financial giant.
Mr Monks noted “lots of caveats” in his report, and that his central forecast is a more moderate peak of 5.75 percent in November.
5.75 percent interest rates would match the highest rate experienced during the 2007 financial crash, and were only surpassed in February 2000.
Mr Monks’ high prediction of seven percent would be the highest interest rates experienced in Britain since October 1998.
Yesterday at the Liaison Select Committee, Rishi Sunak warned interest rate rises were struggling to feed through into immediate inflation reductions because of the prevalence of fixed rate mortgages, meaning many homeowners are yet to feel the effect of rate rises.
JPMorgan’s analysis also found that “higher than normal wage growth” is offsetting some of the blow of more expensive mortgages despite the 18-months-worth of successive hikes.
Britain is now the only G7 country where inflation is still rising, according to a report in The Times.
It is also one of the three worst countries within the 38-strong OECD group of countries.
Inflation increased from 7.8 percent in April to 7.9 percent in May, compared with an average reduction in inflation from 5.4 percent to 4.6 percent in the G7.
The analysis also uses a lower measure of inflation than the official Bank of England calculation, which says CPI is running at 8.7 percent unchanged from April.
The Bank of England has a target set by the Government of keeping inflation to below two percent, something it has failed to achieve despite 13 consecutive base rate rises.
Rishi Sunak is facing political pressure over the issue, as well as economic pressure.
The Prime Minister promised to hold inflation from the then-10.7 percent rate as one of his five targets for the year.
While the aim was mocked when first set as something No 10 would easily achieve without much difficulty, the problem of so-called ‘sticky inflation’ has cast doubt over whether the Prime Minister will achieve his halving aim within the promised timetable.
