A recent release of an economic think tank’s prediction of the economy will make people inhale sharply. In the wake of analysts forecasting a non-changing interest rate for years, a new prediction calls for a dramatic rise. The expectation is that the standard base rate will increase to 8 per cent by 2012.
Should the rate actually go up to 8 per cent, then with the bank’s 3.5 per cent current mark up, homeowners could face 11.5 per cent interest on their mortgage loans. That could amount to a 900 pound increase in monthly mortgage payments.
Dr. Andrew Lilico, chief economist at the Policy Exchange, believes inflation will rise dramatically and the Bank of England will be forced to raise the rate to keep it under control. This will amount to several individual rises that will total at least 8 per cent by 2012.
He also believes the economy will see a double dip recession followed by a short lived boom.
Dr. Lilico said: “Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation.”
He stressed that households would need to reduce their debt between now and 2012 since the rise of the standard base interest rate could lead to many families defaulting on their mortgages.
He said: “If that is the case, then interest rates may have to be kept lower for an additional nine months and the consequence will be inflation peaking at 20% rather than 10%, as in the 1970s.”
Dr. Lilico added: “Given the constraints of late 2008 and the absurdities of subsequent fiscal, finance and regulatory policy, if we can get away with a recession of only 6.6 per cent, deflation of only 2 per cent and subsequent] inflation of only 10 per cent for one year, [Bank of England governor] Mervyn King will deserve a medal.”