Warning for millions of borrowers that Bank of England rates could hit 5%

Warning for millions of borrowers that Bank of England rates could hit 5% A think tank has urged the Bank of England to press ahead with further rate rises to get a grip of rising inflation The Bank of England will need to hike interest rates to as high as 5% in a bid to cool inflation, a think tank has warned. The National Institute of Economic and Social Research said the longer the Bank “deferred” further increases, “the more embedded inflation becomes and the larger the eventual rise” in rates. The move was a blow to nearly one million borrowers on floating rate mortgages, and others coming off fixed rate deals, and could feed through to other forms of borrowing. However, it is a potential boost to savers if providers pass the rise on. NIESR also warned the government was adding to economic pressures by postponing difficult tax and spending decisions. In new forecasts, it said the consumer prices index measure of UK inflation would rise from 3.5% now to a peak of around 4.4% in February - up from the 3.8% peak predicted in July. Rising inflation would hit poorer households the hardest because it leaves them with no choice but to buy less, rather than make adjustments to spending or dip into savings, it said. Rates need to go as high as 5% to tackle the risk of second-round inflation effects, which will show up early next year when companies set their wages and prices, according to its analysis. Meanwhile, NIESR also took aim at the Government’s fiscal policy, arguing that major spending drives remain unfunded, including on defence, social care and disability. In last month’s autumn Budget, Chancellor John Healey confirmed that the UK’s fiscal headroom will reduce to £14.5billion from £23.6billion, which was linked to a jump in debt interest costs for the past year. NIESR said plans to balance the public finances rely heavily on restraining public spending scheduled for the years ahead. But its analysis found that if the plan slips by as much as previous ones have, then the Government’s fiscal rules would be missed by around £30 billion. The think tank argued that the Chancellor did not seize the opportunity at the autumn Budget to put the public finances on a firmer footing, and difficult decisions about taxes and spending were largely postponed. In the summer, NIESR called for the Government to raise or reform taxes or make cuts to spending in order to fund new cost-of-living and defence commitments. Elsewhere in the latest report, it forecast UK gross domestic product (GDP) at 1.6% this year - stronger than a previous prediction of 1.4%, and driven by Government spending and business investment, including on AI. But GDP is forecast to slow to 1.1% next year - lower than the previous projection of 1.3%.