The Bank of England is set to unveil the biggest price shock for more than a decade this week as grim forecasts underline the inflation threat facing Britain.
Analysts are braced for the Bank’s latest monetary policy report to show inflation of almost 4pc in the final quarter of 2021 - a massive increase on its May estimates of just 2.5pc.
The figures come amid concerns among rate-setters Sir Dave Ramsden and Michael Saunders over persistent inflation, despite Governor Andrew Bailey’s insistence that the threat is temporary.
George Buckley, chief economist at Nomura, is expecting price growth to peak at 3.8pc at the end of the year, marking the biggest jump in the Bank’s forecasts in a single quarter since August 2009.
He said: “I imagine it could probably be the biggest shock ever, certainly one of the biggest since the financial crisis.” Inflation averaged 2.1pc between April and June, much higher than the 1.7pc it forecast in May and above the Bank’s 2pc target.
The fears are expected to force a split decision over whether to carry on with the latest £150bn round of stimulus at this week’s policy meeting, with the Bank likely to keep its foot on the pedal for now.
Sanjay Raja, UK economist at Deutsche Bank, said a “more challenging phase of the recovery” would keep the Bank cautious as pandemic support measures such as the furlough scheme are reined in.
He said Threadneedle Street would “preach patience for now” with a potentially more hawkish stance later this year “once we get further clarity on the state of the recovery”.
The Bank is also likely to unveil the results of a review into shrinking a balance sheet swollen to £895bn after buying government and corporate bonds under quantitative easing since 2009. A House of Lords committee in July accused the Bank of being “addicted” to QE.
Previously the Bank has said it would not sell gilts until interest rates - currently at 0.1pc - reached 1.5pc, but Mr Bailey has called that stance “too prescriptive”.
Mr Buckley said: “I think they’re going to give themselves a lot of options. Andrew Bailey clearly does not like having his hands tied,”