The Policy Exchange, a highly influential financial think tank, has issued a recent warning that, in order to combat persistently high inflation, a rise in interest rates of up to 8 per cent may be happening as soon as 2012.
The current interest rate has been static at 0.5 per cent for a record 17 consecutive months straight in an effort to encourage economic growth and limit the length of the economic downturn, but the Consumer Price Index, currently 3.1 per cent, has been well above the 2 per cent target since the beginning of 2010.
With persistent high inflation rates, consumers are finding it increasingly difficult to find savings accounts that have a high enough interest rate that offsets any erosion of their hard-earned cash. Despite savers’ concerns, Bank of England Governor Mervyn King has been dismissive of the idea that interest rates need to be hiked in order to combat inflation.
Dr Andrew Lilico, chief economist for the Policy Exchange, expressed his belief that the economy could easily undergo a double-dip into recession, which would lead to an economic boom that would be powered by a large monetary growth.
Dr Lilico continued, stating that if the the Government persisted with its massive cuts to spending in addition to the possible boom, the economy’s growth could be as explosive as it’s ever been in decades.
Dr Lilico said that once sustainable economic growth is achieved, inflation will be an inevitability as it will be driven by a large expansion in the supply of money. Inflation will trigger interest rates to rise in a rapid manner, Dr Lilico continued, saying that when mortgage rates rise due to an increase in interest rates, the initial result will to be reinforce the rise in inflation.
Dr Lilico predicted the inflation rate to grow to approximately 10 per cent, which while not uncommon, as the early 1990s had a similarly high rate, will exceed the current government target by a factor of five.