Inflation may push rates up to 8 per cent

INFLATION could peak as high as 10 per cent in the next couple of years, a leading policy think tank has warned, forcing a crippling spike in interest rates up to around eight per cent.

Andrew Lilico, the chief economist at the Policy Exchange think tank, believes that once the economic recovery kicks in properly in late 2011 and early 2012, rapid growth in the money supply will see inflation jump to levels not seen since the early 1990s.

Lilico predicts that the consequent sharp rise in interest rates will send inflation even higher to around 10 per cent – and that a base rate of around eight per cent will be required to keep prices from spiralling even further out of control.

“All of this is the optimistic case – what happens if the government gets policy right and its policies work,” the über-bearish economist added.

Official figures from the Office for National Statistics are this week expected to confirm that the UK economy registered positive growth of around 1.1 per cent in the second quarter.

However, Bank of England governor Mervyn King last week admitted that inflation is likely to stay above the two per cent target at least until the end of next year.