Interest rates might have to rise to 8% by 2012 if inflation starts to get out of control, a leading think tank has warned.
The Policy Exchange said that the base rate may spiral rapidly if the Bank of England has to try and combat runaway inflation.
According to the chief economist at the think tank, Andrew Lilico, once the economy starts to see sustainable growth, inflation could rise to around 10%.
This, in turn, will lead to a significant rise in interest rates, in order to try to bring the situation back under control.
However, since interest rate rises will raise mortgage rates as well, Lilico says the initial effect will lead to even more inflation.
"To keep inflation (as measured by the retail prices index) down to only 10% for one year, the economy will have to be able to tolerate interest rates of perhaps 8%," he adds.
Although such a dramatic hike in interest rates would be brilliant news for savers, the prediction coming to fruition would be less welcomed by borrowers.
If your mortgage deal is at an end, and you think that interest rates might be about to rise, now could be a good time to opt for a fixed rate mortgage deal.
Recent figures suggested that fixed rate mortgage deals are back in favour once again, with almost half of new mortgage borrowers choosing to fix their rate in June.
With the cost of fixed rate mortgage deals actually falling, opting to take such a deal now is becoming ever more appealing.
Indeed, recent research from Moneyfacts.co.uk showed that the price of fixed rate mortgage deals had fallen to a seven year low.
Amongst some of the best deals available at present is a two year fixed rate mortgage from Yorkshire Building Society currently available at a rate of 2.99%.
ING Direct has a similar fixed rate mortgage deal in place priced at 3.09%.
Over the longer term of five years, HSBC is currently offering a five year fixed rate mortgage deal at 3.95%, while Britannia is offering some excellent long term fixed rate deals too.
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