By Ade O'Connor
Rising inflation could force interest rates up to 8 per cent by 2012, according to a think tank.
Policy Exchange chief economist Andrew Lilico has warned the Bank of England may significantly increase the base rate because of sharp increases in inflation.
Dr Lilico believes the UK will probably suffer from a double-dip recession, before huge monetary growth results in a boom and the strongest economic growth since the 1980s. In a research note, he said: "Once the economy gets growing sustainably, there will be a huge expansion in the money supply, which will lead to inflation."
The Bank has already injected £200 billion into the economy through its quantitative easing programme. However, Dr Lilico believes this move has quadrupled the money base. He believes once the economy starts growing again, lending will expand and there will be "too much money chasing too few goods".
But he added that if households did not take the opportunity to reduce their debts between now 2012, interest rate hikes to 8 per cent would lead to mass mortgage defaults.
