Inflation may hit 15% this winter, as Bank of England hints it was considering steeper interest rate rises to cool inflation
- The Bank of England may raise interest rates by 0.5 per cent to offset inflation
- Currently the Bank is predicting inflation could hit 11 per cent in the winter
- Economists have warned this could reach 15 per cent if Russia ‘turns off the taps’
Inflation could soar to 15 per cent this winter, economists have warned.
It comes after the Bank of England hinted it was considering steeper interest rate rises to cool inflation, which hit a 40-year high of 9.4 per cent last month.
If projections by the consultancy arm of accounting giant EY are accurate, it would push the rate of price rises nearer to levels seen in the ‘Winter of Discontent’ in the 1970s, when soaring costs and pay disputes caused waves of strikes.
The forecasts are based on Russia shutting off gas to Europe in retaliation for sanctions and ongoing food price rises as Ukraine’s grain exports remain disrupted. Mats Persson, of EY, told The Sunday Times firms were now modelling for inflation to peak at 15 per cent in the winter if Russia ‘turns off the taps’.
The Bank of England hinted it is considering a large raise in interest rates to offset skyrocketing inflation which they think could reach 11 per cent (Governor of the Bank of England Andrew Bailey pictured)
Accountancy firm EY have predicted inflation could hit 15 per cent if Russia stops supplying gas to Europe (pictured: pipes and pressure gauges for gas lines in Europe)
The forecasts also included predictions of an ongoing rise in food prices as grain exports from Ukraine remain disrupted following Russian missile attacks on the port of Odesa in the Black Sea.
Mr Persson added companies would need to think about becoming creative with pay deals for staff, such as offering more perks or profit-linked salary increases, to retain workers without pushing prices higher by increasing wages.
EY’s worst-case prediction is higher than the current estimates from the Bank of England, which is expecting inflation to reach 11 per cent before the end of the year.
In a speech earlier this month, Governor Andrew Bailey said a 0.5 percentage point interest rate increase would be ‘on the table’ when the Bank’s monetary policy committee meets next week.
That would be the biggest rise since 1995 and take rates to 1.75 per cent, the highest since December 2008.
Surging inflation, exacerbated by the war in Ukraine and global supply chain issues, has pushed up the cost of everything from meat, vegetables and coffee to household energy and petrol.
High levels of inflation has pushed up the prices of nearly everything, leading to fears that a lack of consumer spending could lead to recession
The scale of price increases has forced many families to tighten their belts, raising fears that a lack of consumer spending could tip the economy into recession.
Meanwhile, the rise in interest rates has pushed up mortgage costs for millions of homeowners.
UK interest payments on Government debt also reached their highest level on record in June as the Office for Budget Responsibility predicted the payments will reach £87 billion this financial year.
Combatting inflation has been a key issue in the Tory leadership battle between former Chancellor Rishi Sunak and Foreign Secretary Liz Truss, with both candidates offering varying approaches to try to revive the economy and rein in rising prices.
Sunak said Britain ‘should not be complacent’ about inflation and previously vowed to ‘get a grip’ on price increases before cutting taxes.
Truss, meanwhile, has outlined more immediate plans for £30bn in tax cuts that she said will decrease inflation and boost economic growth, although Patrick Minford, an economist associated with the Foreign Secretary, said this meant interest rates would need to rise to 7pc.