Interest rates are expected to be hiked once again on Thursday to their highest level for 13 years as the Bank of England battles to cool rocketing inflation.
The Bank’s policymakers are predicted to increase rates from 0.75% to 1% – a level not seen since early 2009 – and ramp up its forecasts for inflation as the Ukraine war compounds a crippling cost-of-living crisis.
Members of the Monetary Policy Committee (MPC) have already raised rates at each of its past three meetings to try to rein in inflation, which hit a 30-year high of 7% in March.
The cost crunch is expected to tighten its grip later this year when the energy price cap is revised once again, with warnings inflation could peak at 9% or even double digits in the autumn.
As households and businesses tighten their belts in the face of the cost pressures, UK growth is set to suffer and the Bank is likely to cut its outlook for the economy as well on Thursday, according to experts.
Governor Andrew Bailey has recently warned the Bank is “walking a very tight line” between tackling inflation and avoiding a recession.
Investec economists said: “The UK is in the grip of the cost-of-living crisis.
“Coupled with tax rises, this leaves a rocky road ahead.”
They expect that a recession will be averted, thanks in large part to the savings built up by households in the pandemic, but said slowing growth and soaring inflation “leaves the MPC in a bind”.
Investec is pencilling in another rate hike in August to 1.25%.
But it sees the Bank pausing after this “to assess how big the effect of the real income squeeze on activity turns out”, before pushing through two more rate rises in 2023.
Growth already began to pull back sharply in February as the cost-of-living squeeze took hold, with official data showing expansion of just 0.1% down from 0.8% in January.
The Bank said last month it believed growth would stand at about 0.75% in the first quarter, up from a previous expectation for gross domestic product (GDP) to remain flat, with the jobs market also holding up well.
But many experts see GDP flatlining in the second quarter as consumer confidence falters in the face of surging price pressures.
The Bank is also expected to clarify on Thursday how it plans sell off some of its £847 billion in government bonds, which it has built up as part of its quantitative easing programme launched amid the 2008 financial crisis.
It has already said it may consider starting active sales of the gilt portfolio, which peaked at £875 billion at the end of last year, once rates reach 1%.
While a quarter point rise would see it reach this threshold, experts do not expect the Bank to rush into so-called quantitative tightening and predict it will merely lay down the plans for such a move or launch a consultation.