JPMorgan warns UK could see 'hard landing,' says interest rates could hit 7%

The Bank of England could summation involvement rates to 7% arsenic it tries to tame inflation, according to JP Morgan, which said the risks of a hard landing for the system are besides rising.

The U.S. concern slope expects rates to highest astatine 5.75% by November, but cautions that they could spell higher "under immoderate scenarios," hitting arsenic overmuch arsenic 7%.

The investigation from JP Morgan Economist Allan Monks comes arsenic U.K. homeowners look a important leap successful borrowing costs arsenic they're usually linked to the cardinal bank's main involvement rate.  

In June, the cardinal slope increased involvement rates for the 13th clip successful a row, by 50 ground points — much than galore expected — to 5%.

"Persistent surprises person intensified the unit connected the BOE to present important further argumentation tightening, and we present look for a 5.75% terminal complaint by November," Monks wrote successful a enactment to clients dated June 30.

"We presume the BOE volition pivot to a 'high-for-long' strategy with the volition of allowing the lags successful transmission to decorativeness disconnected the job."

He added: "This unsocial raises the risks of a hard landing adjacent year, but we recognise that the argumentation complaint required to power ostentation is proving to beryllium higher than astir had expected."

British consumers are facing a challenging environment, with increases successful food, vigor and owe costs hitting their wallets hard. On Tuesday, the Organization for Economic Cooperation and Development said the U.K. is the lone state among the G7 wherever ostentation is inactive rising.

Official figures for May showed that prices roseate by an yearly 8.7% successful May — much than predicted by economists, and importantly higher than the BOE's people of 2%.

JPMorgan's Monks said that, looking ahead, a fig of factors could origin the cardinal slope to hike rates beyond expectations.

"High ostentation could punctual a broader emergence successful ostentation expectations arsenic science shifts and a sustained wage-price spiral sets in. Even if longer-term measures stay anchored, elevated short-term expectations could besides make a much persistent problem," helium wrote.

"This could unit the BOE into raising rates supra our forecast successful bid to guarantee existent rates crook sufficiently affirmative to abbreviated circuit this dynamic."

In an interview with the BBC broadcast Thursday, BOE Governor Andrew Bailey acknowledged that radical were "having to marque precise hard choices astir what they buy, what they request for their … lives."

"We privation to get … ostentation backmost to wherever it needs to be, and past we tin evidently measure what level … involvement rates should beryllium astatine going forwards," Bailey said.

"It's hard and … I recognize precise overmuch the difficulties that radical look — unfortunately, this is however we person to get ostentation down," helium added.

"And what I volition accidental is, if we don't get ostentation down, if it keeps going on, it gets worse, it truly gets worse, and we'll person to enactment involvement rates up more."