© Reuters. FILE PHOTO: People shop at market stalls, with skyscrapers of the CIty of London financial district seen behind, in London, Britain, January 15, 2021. REUTERS/Toby Melville/File Photo
LONDON (Reuters) – British consumer price inflation will reach 3.9% early next year, almost double the Bank of England’s target, but should fall back to 2% the year after if the BoE begins to raise interest rates, a leading think tank forecast on Monday.
The National Institute of Economic and Social Research (NIESR) also revised up its growth forecast for 2021 by 1.1 percentage points to 6.8% – broadly in with the most recent forecasts from the BoE and the International Monetary Fund.
After suffering its biggest economic slump in over 300 years in 2020 due to the coronavirus pandemic, Britain’s economy has been recovering rapidly this year.
But a sharp rise in oil prices and bottlenecks in supply chains have pushed up inflation in Britain and most other Western economies, with NIESR’s forecast suggesting British inflation is on course to hit its highest since late 2011.
“To prevent a possible dislodging of inflation expectations, the MPC should prepare the ground for normalising its monetary policy stance, and this involves clearly communicating how Bank Rate and asset purchases and will be adjusted in response to higher inflation,” NIESR Deputy Director Hande Kucuk said.
The BoE’s Monetary Policy Committee should emphasise that policy tightening would be gradual, to avoid a sudden tightening of financing conditions that could derail recovery, she added.
Unemployment was likely to rise by 150,000 to 5.4% of the workforce after the government’s furlough programme stopped at the end of September, NIESR said.
The BoE will set out new growth and inflation forecasts on Thursday, and many economists expect it to update guidance about when it might consider beginning to reverse quantitative easing bond purchases.
However, the central bank is still buying bonds to hit an 895 billion pond asset purchase target it set in November last year. Financial markets price in a first 15 basis point rise in rates to 0.25% by August of next year, though most economists think the BoE will take longer.
The BoE’s last full set of forecasts in May predicted inflation would peak at 2.5% at the end of this year, but in June it revised this higher to see a peak of more than 3%.
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