Vantage Point: Economic Outlook  

Interest rates could hit 2% next year, says MPC member

Interest rates could hit 2% next year, says MPC member
Michael Saunders, who is departing the MPC this summer

A member of the monetary policy committee has said the base rate of interest could reach 2 per cent next year and the tightening cycle has “some way” to go.

In a speech yesterday (July 18), Michael Saunders, said although the exact future path of bank rates is inherently uncertain, he does not regard it as unlikely that the rate will rise to 2 per cent, and noted the markets are pricing in higher hikes.

“Rather than focus on a precise forecast for [the] bank rate over the next year, the key point is that the tightening cycle may (in my view) still have some way to go," he said.

Inflation has soared above the Bank of England’s 2 per cent aim each month since May last year, rising above 9 per cent in the 12 months to May earlier this year.

The BoE has said it expects inflation will rise to 11 per cent in October, when the energy price cap is renewed.

Saunders, who is an external member of the committee and due to leave later this summer after six years, said in May that inflation may exceed the BoE’s forecast, calling price rises “uncomfortably high”.

In his speech yesterday, he highlighted the “unusually low” starting point for the base rate of interest, which had sat at 0.25 per cent for more than a year between 2016 and 2017.

The rate now sits at 1.25 per cent, having been raised for a fifth time in a row last month.

However, he said the UK economy is starting to face increasing challenges from demographic trends which are likely to cause “persistently low workforce growth in coming years”, limiting economic growth.

He said: “It is especially important at present to lean against risks that recent trends in inflation expectations, underlying pay growth and firms’ pricing strategies become more firmly embedded.”