Interest rates set to hit 2% by 2021, BoE warns

Written by Adam Cadle
26/03/2018

Interest rates are set to hit 2% by 2021, Bank of England policymaker Gertjan Vlieghe has warned.

Vlieghe said the UK was likely to see “one or two” interest rate rises each year up to March 2021, which would push the base rate up from 0.5% to 2%.

The cost of borrowing last hit 2% in December 2008, when the Bank was cutting interest rates in an effort to prop up the economy. Rates fell from 5.5 % in December 2007 to 1.5% in January 2009.

Last week, MPC members broke consensus and voted for an immediate 0.75% rise in interest rates.

The Bank of England left interest rates unchanged today at 0.5%, but both Ian McCafferty and Michael Saunders are worried that inaction now will mean rates will need to rise faster and further in future.

Sterling jumped on the news, hitting a seven-week high against the dollar.

Hargreaves Lansdown senior economist Ben Brettell said: “The Bank faces a delicate balancing act. Inflation seems to be falling back towards the target of 2%, as the effect of the weaker pound starts to filter out of the calculation. But a pick-up in wage growth points to an erosion of slack in the labour market. This raises the prospect that a wage-price spiral could push inflation back up in future. Throw in a hefty dose of Brexit-related uncertainty and it’s easy to see why the committee is divided at present.”

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