(Picture: PA Archive)
Millions of homeowners have been put on notice of a higher than expected rise in interest rates over the next year as one of the Bank of England’s rate setters said they may have to be lifted to 2 per cent or higher to tame soaring inflation.
With Tory leadership hopefuls battling it out over tax cuts and plans to deal with the cost of living crisis, Michael Saunders, one of the four external members of the BoE’s nine-strong Monetary Policy Committee, said further monetary tightening was likely in the coming months .
The Bank has already raised interest rates from its historic low of 0.10 per cent at the start of the Covid pandemic to 1.25 per cent and is expected to lift them further when it meets next month.
But Mr Saunders, who is due to stand down from the MPC in August after six years, said in a speech to the Resolution Foundation think-tank on Monday that market expectations of 2 per cent or higher during the next year were not “implausible”.
“The precise path of future monetary policy is, of course, inherently uncertain, because it will depend on future economic developments that cannot yet be foreseen,” Mr Saunders said.
“But I note that the BoE Market Participants survey and the Treasury’s survey of external forecasters both suggest that Bank Rate will rise to around 2 per cent in the next year. Market pricing is even higher.
“Neither the external consensus nor the path of inflation breakevens implies that such a rate path will leave inflation below target over time.
“Without wishing to endorse those views too strongly, I do not regard such an outcome (ie that Bank Rate will have to rise to 2 per cent or higher during the next year to return inflation to target) as implausible or unlikely.
“But, rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may (in my view) still have some way to go.
“My own view is that further monetary tightening is likely, and indeed, as evident from my votes at the MPC’s recent policy meetings, my preference has been to tighten relatively quickly.”
The Bank is committed to maintaining a 2 per cent target of inflation. But the rate at which prices are rising hit 9.1 per cent in May and is forecast by the Bank to rise to 11 per cent in the autumn.
With energy bills set to jump even higher in October when the energy price cap set by Ogfem is reviewed, the cost of living crisis is set to worsen for millions of households.
The race to replace Boris Johnson as Prime Minister is taking place against a worsening economic outlook with some of the leading candidates going into Monday evening’s latest ballot pledging to reduce taxes to ease the cost of living crisis.
Former Chancellor Rishi Sunak has said he would not reduce taxes until inflation is brough back under control.
But Foreign Secretary Liz Truss has pledged £30bn of tax cuts, saying she would reverse the National Insurance rise of 1.25 percentage points introduced in April to raise £12bn a year for the NHS and social care and scrap corporation tax rises due next year.
Mr Sunak has accused Ms Truss of peddling “something for nothing economics”.
Ms Truss has also questioned the role played by the BOE and its independent control of monetary policy.
In an interview with the Sunday Telegraph the Foreign Secretary said she would “look again” at the mandate agreed with the Government “to make sure it is tough enough on inflation”.
She said: “I fear that some of the inflation has been caused by increases in the money supply. For me, handling inflation is an issue of monetary policy. And as well as having a very clear plan on how we reform the supply side, how we get public sector spending under control over time, I would also have a very clear direction of travel on monetary policy.”
