UK interest rates might have to hit 2% or more next year to order to slow soaring price rises, a member of the Bank of of England’s rate setting committee has said.
Michael Saunders said rate rises “still have some way to go” in the attempt to control inflation.
UK interest rates currently stand at 1.25%, up from 0.1% in December.
Inflation – the rate at which prices rise – is at a 40-year high of 9.1% and expected to rise further by the autumn.
Raising interest rates makes it more expensive for consumers and businesses to borrow. The idea is that people start spending less, helping slow demand for goods and services and, in turn, reducing the pace of price rises.
But some economists have warned that increases in interest rates may have little effect on inflation, one of the main factors behind it at the moment is rising global oil and gas prices.
At the last meeting of the Bank of England’s Monetary Policy Committee (MPC) – which sets rates – Mr Saunders voted to raise rates to 1.5%.
In a speech at the Resolution Foundation think tank, Mr Saunders – who will be leaving the MPC after the next rates decision in August – said that if the Bank fails to take strong action now, it could risk acting “too little too late”.
He said the Bank had to “balance the risks and costs of tightening ‘too much, too soon’ versus ‘too little, too late’.
“In my view, the cost of the second outcome – not tightening promptly enough – would be relatively high at present,” he added.
The economist acknowledged that there were signs that economic activity was slowing, as rising inflation “erodes real incomes and spending”.
However, he added: “This slowdown must be gauged against the backdrop that the economy early this year was in excess demand, potential growth is low, recruitment difficulties are elevated, and there is a sizeable backlog of unmet labour demand.”
