Get ready for 2pc interest rates, says Bank of England policymaker

HOUSEHOLDS must brace for interest rates to surge above 2pc, one of the Bank of England’s top policymakers has said, as he warned against acting “too little, too late” to stamp out high inflation.

Michael Saunders, a member of the Bank’s Monetary Policy Committee (MPC), said that rate rises “still have some way to go” after inflation surged to its highest level in 40 years.

He said it is not “implausible or unlikely” that the Bank’s base rate will need to jump from its current level of 1.25pc to 2pc and above, arguing that policy should “tighten relatively quickly”. The Bank has been forced into numerous back-to-back rate rises after predicting that inflation would top 11pc in the autumn following the energy price surge.

However, officials at Threadneedle Street have been attacked by Tory leadership candidates for failing to curb inflation sooner with its bond-buying scheme facing criticism.

Mr Saunders, who leaves the MPC next month, warned that the Bank’s independence and policy framework are “really important” and “best left untouched”.

He said: “The Government very clearly does not set the direction of travel for monetary policy. That’s set by the independent MPC in order achieve the 2pc inflation target.

“And that’s fundamental to the UK’S framework and the credibility of that framework, I think, has served the UK well over the last 25 years.”

Markets expect interest rates to near 3pc by the end of the year, a much faster pace than the Bank has indicated to investors.

However, Mr Saunders has voted for larger rate rises to rein in prices at recent meetings.

Mr Saunders said: “The MPC has to balance the risks and costs of tightening ‘too much, too soon’ versus ‘too little, too late’.

“In my view, the cost of the second to outcome – not tightening promptly enough – would be relatively high at present.”

Doing too little would ramp up the “costs of returning inflation to target in coming years”, he added.

Mr Saunders gave a gloomy assessment on the long-term health of the economy, warning that the UK is facing “persistently low workforce growth in the coming years”.

That will limit potential growth – the long-run average annual rate – to just 1pc to 1.25pc as the size of the labour force is held back by an ageing population and lower immigration, he said.

Low unemployment combined with a fall in the number of available workers has caused crippling staff shortages in many sectors since the reopening of the economy.

Mr Saunders’ comments came as the International Monetary Fund (IMF) warned Conservative Party leadership challengers that slashing taxes now would be a mistake as it could send prices even higher.

Mark Flanagan, IMF mission chief for the UK, said money raised from hiking taxes could be used to invest in policy goals, such as the climate transition, digitalisation and skills. “I think debt-financed tax cuts at this point would be a mistake,” he told the BBC.

Meanwhile, figures published yesterday revealed that savings rates have reached their highest level in two years despite almost half of accounts still not beating the Bank of England rate.

The number of savings accounts that can beat the Bank rate of 1.25pc now represents 51pc of the savings market, according to Moneyfacts.