Interest rates could rise to 8 per cent in 2012 to combat a surge in inflation, according to the chief economist at the Policy Exchange.
Andrew Lilico warned that the UK could face a double dip recession followed by a massive boom, which will need to be restrained with a higher interest rate to prevent falling back into another recession.
He said there is a scope for a strong recovery at the moment but once it’s in action the government will “find it very hard to control because the growth will be explosive. They’ll get a big boom and then they’ll have to tighten hard. Our ideas of what a normal interest rate is to deal with a boom need to be a bit more realistic than they are now”.
He continued: “Given the constraints of late 2008 and the absurdities of subsequent fiscal, finance and regulatory policy, if we can get away with a recession of only 6.6%, deflation of only 2% and inflation of only 10% for one year, Mervyn King will deserve a medal. To keep [RPI] inflation down to only 10% for one year, the economy will have to tolerate interest rates of perhaps 8%”.
Mr Lilico’s prediction means that thousands of home owners could be forced to pay huge mortgage payments to lenders in the coming years – a property worth £150,000 today, dealing with a £6000 annual home loan figure, could have to meet a yearly payment of £17,250.
Mr Lilico did not blame government experts for the 8 per cent inflation rate predicted. He said: “It’s not that policy makers are getting it wrong — they’re getting it right — I just think the consequences of them getting it right will in the end be inflation”.