The Bank of England may need to push interest rates to as high as 7% to tackle stubbornly high inflation, economists have warned, amid fears the soaring cost of borrowing could drive the economy into recession.
With households under growing pressure from rising mortgage costs, the US investment bank JP Morgan said there was a risk that persistent inflationary pressures could lead the central bank to raise interest rates by more than expected.
It comes as mortgage lenders have been increasing rates and withdrawing cheaper deals after the Bank raised interest rates by a half point to 5% last month, as the UK struggles to bring down the highest inflation rate in the G7.
Financial markets expect the Bank will increase its base rate above 6% before Christmas. JP Morgan said its central forecast was for rates to peak at a lower level of 5.75% by November, but warned rates could go higher, possibly to 7% under “some scenarios”.
The US bank said there were heightened risks of a “hard landing” for the British economy next year, from the impact of surging borrowing costs hitting business confidence and driving up unemployment.
The prospect of the Bank engineering the conditions for a recession to tackle stubbornly high inflation comes as figures suggest the UK economy has performed more strongly than anticipated in recent months.
According to the latest monthly health check from S&P Global and the Chartered Institute of Procurement and Supply, companies reported a sustained upturn in the UK’s services sector in June, with job creation edging up to a nine-month high.
Economists have suggested that strength in the UK jobs market is adding to inflationary pressures, after figures showed annual growth in average workers’ pay rose to among the highest levels in two decades in April amid near record job vacancies.
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