Can the economy handle interest rates of 3%?

We estimate that a rise in Bank Rate from 0.10% last November to a peak of 3.00% would mean that GDP is around 2.0% lower than if Bank Rate had stayed at 0.10%. That is a smaller drag than the Bank of England has incorporated into its forecasts. We do not expect this to generate a recession, but the risk is very real. The danger is that rising interest rates and falling house prices prompt a negative feedback loop that results in a bigger hit to GDP than we expect.