Bank of England deputy governor Ben Broadbent has said it ‘remains to be seen’ whether UK interest rates have to rise as much as the markets predict.
That could bring some relief to mortgage-holders, who are concerned that interest rates are currently forecast to more than double to over 5% by next summer.
Speaking at Imperial College London, Broadbent explains that the economy has been hit by severe real shocks.
“The pandemic raised the global demand for goods and reduced their supply; Russia has cut back severely its supply of gas to Europe. These have had dramatic effects on relative prices.
“In particular, import prices have risen significantly compared with the price of UK output. This has unavoidably depressed real incomes: the volume of output may have just about recovered to pre-Covid levels but its consumption value has not.”
Broadbent also warned that the economy would suffer a hit if market bets about rising rates come to pass.
Broadbent explains that the Bank’s Monetary Policy Committee will respond promptly to news about fiscal policy (the MPC is due to set interest rates on November 3rd, three days after Jeremy Hunt is due to announce his fiscal plan).
Broadbent says the justification for tightening monetary policy is clear (inflation is five times over the Bank’s 2% target, for starters).
But much of the overshoot in inflation is due to higher import prices (such as gas, and food which has risen by over 14% in the last year). That effect should fade as prices stabilise.