Expert: BoE’s aggregate rate policy could hit 4%

The Bank of England will possibly need to hike interest rates more sharply than financial markets expect in order to get tame soaring inflation according to a former policymaker.

The BoE’s Monetary Policy Committee raised its key interest rate four times since December to 1%, it is so the highest aggregate hike since 2009, but economists still expect inflation to surpass 10% by the end of 2022.

“In my view the nominal interest rate – the short-term interest rate the MPC controls, will have to go up at least 250 to 300 basis points from here,” Adam Posen, who served on the MPC from 2009 to 2012, told the British parliament’s Treasury Committee. That would mean an interest rate of 3.5% to 4% – well above the 2.5% peak priced in by financial markets for June 2023.

Posen, who is now the president of Washington’s Peterson Institute for International Economics, said unemployment needed to go higher.

Last month the International Monetary Fund forecast the United Kingdom would exhibit weaker growth and higher inflation than any other major advanced economy next year. While nations globally suffer from soaring energy prices and supply chain bottlenecks amid the ongoing Russia’s invasion of Ukraine, Posen said the extra inflation in Britain appeared to be mostly due to Brexit.

The BoE’s own forecasts do imply interest rates might rise less than markets expect, as it predicts inflation will significantly undershoot the 2% target within three years if interest rates follow the path expected by markets. Annual consumer price inflation in the UK touched 7.0% in March, the highest reading in 30 years.