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Updated: 18:32 08/08/22

Deutsche Bank: UK interest rates could hit 2.5% by February

By Liam Sheasby, News Editor

10 Jun 2022

Investment bankers Deutsche Bank are predicting a much steeper rise in interest rates from the Bank of England as the UK looks to rein in inflationary pressure on the economy.

This week sees the Monetary Policy Committee meet for its next assessment of the British economy and the prediction is for another quarter percentage point rise, bringing the UK to a 1.25% interest rate, but DB’s chief economist Sanjay Raja expects a lack of unanimity within the group – and believes members of the group will be angling for a half percentage point rise for more immediate impact.

Deutsche Bank reportedly now believe that the MPC will raise rates at every opportunity for the next three meetings; a minimum of .75% added to rates but potentially the BoE could jump in half percentage point increments instead, given the state of the economy and rising inflation in both the United States and the Eurozone. This would put the UK at a 2.5% interest rate and the highest since December 2008, when rates dropped from 3% to 2% in the face of economic turmoil and the biggest financial crisis for a generation.

According to the OECD thinktank in Paris, the UK will post zero growth to GDP in 2023, with Britain bearing the brunt of the repercussions of war in Ukraine outside of Russia and Ukraine themselves. Energy and food prices are rocketing up, which is driving inflation and hitting the public purse.

The Treasury has stated it is well prepared to protect the economy, but one such protection measure could be to deliberately trigger a recession – a controversial measure but something that might just work. An article from The Guardian focused on comments by Adam Posen of the Peterson Institute in Washington, USA. Posen cites wages increasing due to a shortage of workers and pointed to a wage spiral effect that could occur over the next few years. Boris Johnson has already made it clear he wants to avoid this, but Sharon Graham, General Secretary of UNITE, criticised the PM, arguing that wages are chasing inflation and not wages leading inflation.

Regardless, the rapidly rising cost of living coupled with wages falling behind inflation needs to be addressed and quickly. Perhaps such a drastic move is the solution...

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