As Britain struggles to lower interest rates of inflation among the G7 group of major countries, choppy seas may be ahead as Goldman Sachs is sounding the alarm, warning that the Bank of England may be forced to raise interest rates to 5% by summer.
According to a report by The Guardian, Threadneedle Street could be poised to increase borrowing costs for businesses and individuals in an effort to stave off inflation, with financial markets projecting a jump of a quarter of a point, to 5%.
“We think the UK can avoid a deep recession,” Jari Stehn, Goldman Sachs’ chief European economist, said in The Guardian report. “The growth picture is a more constructive one than the Bank of England has been painting.”
Amid the financial uncertainty, the U.S. investment bank took a cautious tone, according to the report, noting that should the central bank move to reduce the highest rates of inflation in more than four decades to more workable levels, the cost of borrowing would go up for businesses and individuals.
Moreover, the report noted that British families are already struggling with soaring costs and inflation at 10.1%, following a March drop that failed to live up to expectations.
Prime Minister Rishi Sunak had pledged to cut inflation in half this year, and The Guardian noted in its report the government doesn’t want to see inflation remain high, adding pressure on consumers facing the cost of living struggle.
Inflation stood at 10.7% when Sunak made the pledge, and it was set to drop quickly as energy costs dropped around the world, the report noted, citing Goldman, but it was not likely that the cost of living would drop enough to meet the Bank’s stated goal of 2%.
The report also noted that even if the increase is made this week, Ibrahim Quadri, an economist at Goldman Sachs, told the news outlet it wasn’t likely it would be able to slow the increases to a quarterly occurrence.
“We therefore expect the monetary policy committee to continue to hike in 25 basis point steps until reaching a terminal rate of 5% in August,” he told the publication.
