Interest rates may soar to 8% in two years: Policy Exchange

British think tank Policy Exchange rampant inflation could compel monetary policies to hike interest rates to 8 per cent in two years.

Andrew Lilico, chief economist at the influential Policy Exchange, said that an economic recovery would let loose a wave of money. He added that there was a possibility of double-dip recession, which would then be followed by a boom and bust.

He added that the monetary authorities would print more money. The explosion in the money supply coupled with government spending cuts, would result into the fastest economic growth rate in around last two decades.

Commenting on the topic, Mr. Lilico said, "Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation."

Mr. Lilico further said that the Bank of England’s policy had quadrupled the monetary base and once the economy begins growing again, lending would swell and there would be too much money pursuing too few goods.

He estimated that the retail price index would rise above 10 per cent. Meanwhile, the consumer price index, the inflation measure that the Bank is responsible for keeping at around 2 per cent, would jump above 6 per cent.

The Bank of England has already injected £200 billion into the economy under quantitative easing programme to enhance demand. In addition, the Bank has left key interest rate at its record low of 0.5 per cent.