NIESR says Bank may need rates at 5% to curb inflation

The National Institute of Economic and Social Research says the Bank of England may need to raise interest rates to 5% to curb persistent inflation, warning that the rate could remain above its 2% target until late 2030 if the Bank makes only one further increase.

The Bank raised its policy rate to 4% last week. NIESR expects one more increase but argues that would not be enough to prevent inflation becoming embedded in the economy. Its forecasts put inflation at a peak of about 4.4% in February, up from the 3.8% peak it predicted in July.

The institute’s concern is that companies and workers will set prices and pay at a time when inflation is expected to remain high. NIESR estimates roughly three-quarters of UK workers will agree pay settlements in the first three months of next year, when inflation is expected to be above 4%. It says that timing could reinforce wage and price pressures.

Bank of England Governor Andrew Bailey has described a smaller increase as a possibility under particular conditions. He said he could see a case for raising rates to 4.25% if energy prices stayed elevated and a larger inflation spike emerged. His comments were conditional, while NIESR is...