Bank of England deputy questions "dramatic" hikes in interest rates

The Bank of England's deputy governor of monetary policy has questioned whether "dramatic" hikes in interest rates are necessary amid signs global prices are stabilising.

It remains to be seen whether base rates will rise to the level that markets predict, Ben Broadbent told students at Imperial College London.

Mr Broadbent also said if bank rates reach 5% - which markets have bet on in 2023 - it could hit gross domestic product by about 5%.

The widely respected expert economist made the point that soaring inflation has largely been driven up by higher import prices, particularly on gas and food, which will drop back down over time as costs ebb and flow.

This has been caused by severe economic shocks such as the Covid-19 pandemic and Russia's war on Ukraine.

He said: “It remains the case that most of the overshoot in headline Consumer Prices Index inflation, relative to target, reflects the direct impact of higher import prices.

"It also remains likely that much of this is likely to fade as those prices stabilise. This appears already to be happening in areas most affected by the pandemic."

Wholesale energy prices have soared by about 300% on average in the past six months but are likely to "fall significantly" in the next couple of years.

The Bank of England's Ben Broadbent questioned the need for 'dramatic' tax hikes

Mr Broadbent added: "It's understandable, faced with this extraordinary squeeze, that people and firms in the UK economy have sought to protect their real incomes - whether pay or profits - through compensating rises in wages and domestic prices.