Interest rates set to hit 5% next year as Bank steps up inflation fight

Interest rates look set to hit 5 per cent next year as the Bank of England is forced to step up its fight against inflation after Kwasi Kwarteng’s £45billion tax-cutting bonanza.

Analysts think rates must rise more than previously thought as the mini-Budget boosts the economy – and inflation. 

Rates have already risen from 0.1 per cent to 2.25 per cent since December. 

And investors are betting they will reach 5.25 per cent next year, their highest level since 2008. The move could even include a one percentage point rise at the next meeting of the Monetary Policy Committee (MPC) in November. 

Jagjit Chadha, director of the National Institute of Economic and Social Research, said the minibudget would result in a shorter recession and stronger economic growth. But he added: ‘The potential inflationary effects of this are likely to lead the Bank of England to raise rates more aggressively than we previously expected. 

‘We expect it to peak at around 5 per cent in the third quarter of 2023.’ 

Kwarteng described the Bank’s independence as ‘sacrosanct’. 

Levelling Up secretary Simon Clarke urged the Bank to step up its fight against inflation, which was 9.9 per cent last month. Asked if the Bank was ‘asleep at the wheel’ last year on inflation, he said: ‘I don’t believe they were.’ 

He told LBC Radio: ‘We have confidence in the MPC and we want them obviously to redouble their focus on curbing inflationary pressures and we welcome the action they’re taking to do so.’