An economist who advises the Chancellor, Jeremy Hunt has warned that the Bank of England might have to trigger a recession in order to control inflation to get prices under control.
Inflation is proving to be more persistent than expected and JP Morgan’s Karen Ward told BBC Radio 4’s Today programme, “The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession.
“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’.
“It’s that weakness in activity which eventually gets rid of inflation.”
ING developed markets economist James Smith said: “It’s another month where UK inflation has come in dramatically higher than expected and that all but guarantees another rate hike from the Bank of England tomorrow.
“When rates got this high last November, the Bank of England offered some rare pushback against market expectations and signalled a lower peak for rates.
“This time, with inflation consistently coming in hotter than expected, we suspect officials will be more reluctant to offer any firm guidance on what comes next.
“Policymakers won’t want to steer market rate expectations lower, only to find that further inflation surprises force it to go further than it would like over the coming months.”
Rob Morgan, chief investment analyst at Charles Stanley, said: “With prices showing little response to the Bank of England’s twelve successive interest rate rises, today’s figures seal a further increase in interest rates at the Monetary Policy Committee’s next meeting tomorrow from the current level of 4.5%.
“An increase to 4.75% is all but nailed on, but a shock-and-awe rise of 0.5% to 5% cannot be ruled out.
“The Bank of England will likely maintain tight policy for the remainder of the year, meaning further interest rate rises and no significant rate cuts until 2024.”