David Milliken

LONDON (Reuters] – Former policymakers stated Wednesday that the Bank of England would likely have to raise interest rates sharply to keep inflation in check.

Although the Monetary Policy Committee of the BoE (MPC), has increased its key interest rate to 1% four times in December, the most since 2009. However, it still anticipates that inflation will exceed 10% before the year ends.

Adam Posen who was a member of the MPC’s Treasury Committee from 2009-2012 stated that the nominal interest rates – short-term interest rates the MPC controls- would have to rise at least 250-300 basis points.

This would translate into an interest rate between 3.5% and 4%, which is well above the 2.5% price peak that financial markets have priced in for June 2023.

Posen is the current president of Washington’s Peterson Institute for International Economics. He stated that unemployment must rise – effectively calling for a recession in order for inflation to drop back to the BoE’s target of 2%.

According to the International Monetary Fund, Britain will see lower growth and higher inflation in 2014 than any major advanced country.

Posen suggested that the increase in British inflation is mainly due to Brexit, even though countries across the globe are facing rising fuel prices and tight supply chains. This was made worse by Russia’s invasion.

According to the BoE, interest rates could rise less than market expectations. It predicts that inflation will be significantly lower than its target of 2% in three years. If markets follow their path, this would mean that interest rates may not go up as much. In March 2017, Britain’s annual consumer price inflation reached 7.0%, which is the highest level in thirty years.

The current MPC members don’t often speak directly about the possibility of high interest rates.

Kristin Forbes of Massachusetts Institute of Technology was on the MPC 2014-2017. She expressed concern that the BoE hadn’t been sufficiently clear with lawmakers about the potential rate rises.

She said that anyone who plans to buy a house or has a variable rate credit card should be aware of the possibility that these rates might rise to the level Adam mentioned.

Charles Goodhart was a member of the BoE’s initial MPC in 1997 after its independence. He also taught at London School of Economics.

Goodhart said that it would take nominal interest rates much higher than 4% for the market to start to respond. “My bet is that we’ll go above 5%,” Goodhart explained at the hearing on inflation and economic policies.