The UK base rate could be raised as high as 7% to curb stubbornly high inflation, according to JP Morgan, which said the risks of a hard landing for the economy are also rising.
The U.S. investment bank expects rates to peak at 5.75% by November but cautions that they could go higher “under some scenarios,” hitting up to 7%.
The analysis from JP Morgan Economist Allan Monks comes just two weeks since the base rate was hiked by 0.5% to 5% to bring inflation under control, leaving homebuyers struggling to meet rising loan repayments.
The Organisation for Economic Co-operation and Development has said the UK is the only G7 nation where inflation is rising.
JP Morgan warned that surging borrowing costs could hit business confidence and drive up unemployment.
The National Institute of Economic and Social Research estimated last month that 1.2 million households would become insolvent this year as a result of higher mortgage payments.
“High inflation could prompt a broader rise in inflation expectations as psychology shifts and a sustained wage-price spiral sets in,” Monks wrote in a note to clients. “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,” he added.
In an interview with the BBC yesterday, BOE governor Andrew Bailey acknowledged that people were “having to make very difficult choices” when it comes to their financial decisions.
“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,” he said.