London July 5 2023: JPMorgan Chase & Co. said there’s a risk that the Bank of England will have to push interest rates as high as 7% and trigger a “hard landing” in the economy to quell inflation.
Economist Allan Monks said some metrics suggest that the central bank’s key rate will have to rise a further 2 percentage points from the current 5% to bring inflation under control as recession risks mount.
Monks wrote in a note to clients that a hard landing for the UK economy “looks increasingly likely” and warned of “potential upside to rates if expectations do become unanchored or remain high.” He also noted “lots of caveats” and that his central forecast is for a much more moderate peak rate of 5.75% in November.
The remarks add to a darkening outlook for the UK economy after much stronger than expected wage and inflation data led to bets that the central bank will have to keep raising rates through the summer. Investors currently are pricing in rates touching 6.25% by the end of this year, the highest in 25 years.
The analysis by Monks found that higher nominal wage growth is offsetting some of the blow of more costly mortgages even after an 18-month long series of rate hikes. That, he concluded, may mean the BOE will have to push its key rate to 7% to lift the mortgage interest burden to the level that was prevailing in the decade leading up to the global financial crisis in 2008 and 2009.
A second metric looking at business expectations for inflation, forecasts for core prices and an adapted Taylor Rule — a rule of thumb on interest rates and inflation — also points to rates of close to or even above 7%.
Those findings add to concerns that the BOE will struggle to bring inflation back to its 2% target. While price pressure are cooling in the US and eurozone, core inflation accelerated unexpectedly in official data released last month.
“A break in behavior, or hard landing, looks increasingly likely at some point over the next year if inflation is to be brought under control in the UK,” Monks wrote. “The main question is whether the BOE will get some help from external sources in delivering this adjustment, or whether it will have to do all the heavy lifting itself.”