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UK interest rates could hit 2% or even higher, warns Bank of England's Saunders

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·Finance Reporter, Yahoo Finance UK
·2-min read
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Bank of England interest rates
Interest rates: The BoE has ben hiking rates to curb inflation expectations after the recent surge in prices. Photo: Peter Nicholls/Reuters

Bank of England (BoE) policymaker Michael Saunders has warned that interest rates could reach 2% or higher during the next year in order to curb inflation.

Saunders said he expects further rate rises in the months ahead, and that it was neither “implausible or unlikely” that interest rates could reach 2% over the next year.

"I do not regard such an outcome (ie that Bank Rate will have to rise to 2% or higher during the next year to return inflation to target) as implausible or unlikely. But, rather than focus on a precise forecast for Bank Rate over the next year, the key point is that the tightening cycle may (in my view) still have some way to go," he said.

Read more: Inflation: Six in 10 UK firms to pass higher costs to customers

“Economic growth has slowed. But, with excess demand and low potential growth, some further monetary tightening remains likely in coming months in my view, to ensure that inflation returns to the 2% target on a sustained basis,” he added.

Inflation rates are expected to rise again by the end of the year to 11%, despite currently being at its highest rate since 1981.

Inflation in the UK is at record high levels
Inflation in the UK is at record high levels. Chart: Yahoo

“It is especially important at present to lean against risks that recent trends in inflation expectations, underlying pay growth and firms’ pricing strategies become more firmly embedded,” he said.

UK interest rates
UK interest rates

Saunders said that he had hoped rate rises would take place sooner rather than later, as indicated by his recent votes at the Monetary Policy Committee (MPC), which voted by a majority to increase its key base rate by 0.25 percentage points to 1.25% in June in response to the cost of living squeeze.

Read more: FTSE 100: Deliveroo shares slump after slashing revenue outlook

Saunders will be stepping down as BoE policymaker on 8 August.

Watch: How does inflation affect interest rates?

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