The Bank of England is expected to unveil the biggest rise in interest rates in more than three decades next week, even as the country prepares for a potentially deep recession.
Most economists think that the key Monetary Policy Committee (MPC) will raise the base rate by 0.75 percentage points to 3 per cent at the meeting on November 3.
That would be the eighth consecutive jump in interest rates by the central bank, and the biggest increase since 1989.
The move will aim to tame soaring levels of inflation, which is running above 10 per cent.
The meeting comes amid warnings that spending cuts and tax increases under new Prime Minister Rishi Sunak could lead to a deeper and more enduring recession.
After a period of turmoil in Britain, caused by the economic plans of former prime minister Liz Truss, which sparked a bond market rout, the BoE's double-barrelled monetary tightening might look at odds with its current forecasts that the economy will be shrinking until 2024.
But inflation is still likely to be way above the Bank’s 2 per cent target in 2023 and with some of Ms Truss's costly help for households and businesses still in place, the only way is up for borrowing costs.
"As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August," BoE governor Andrew Bailey said on October 15.
Some of Mr Bailey's inflation worries eased two days after he spoke when new finance minister Jeremy Hunt reversed almost all the tax cuts planned by Ms Truss and shortened her income-boosting energy cap programme to six months rather than two years.
Oxford Economics chief economist Andrew Goodwin said the MPC still faced a difficult balancing act.
"Many economic indicators have weakened since the committee last met in September, but the jobs market has remained tight and pay growth strong," Goodwin said.
Earlier this month, markets had predicted the interest rate increase could be as much as one percentage point but sentiment has calmed somewhat after the change of chancellor and prime minister and Bank of England bond purchases pushed down on the cost of borrowing.
Markets have also experienced a decreased appetite for large increases hikes globally, with the Bank of Canada increasing its interest rate by 0.5 percentage points, below the 0.75 percentage point rise which had been widely predicted.
Analysts at Deutsche Bank have said they expect the Bank of England to opt for a 0.75 percentage point rise with a split vote.
Experts at the company said they expect latest forecasts from the Bank of England, which will also be revealed on Thursday, to show that "the economic outlook has deteriorated further".
They said: "Conditioned on market pricing, the UK economy will likely fall into a deeper and more prolonged recession."
Investors say there is about a 90 per cent chance of a 75 basis-point rise in the bank rate to 3 per cent on November 3.
On Friday, analysts at ING forecast a smaller, 50-basis point rise.
The picture farther ahead is clouded by the delay to Mr Sunak and Mr Hunt's plans for repairing the public finances.
Earlier this week it was revealed that an upcoming fiscal statement scheduled for October 31 has been delayed to November 17.
The planned economic statement will set out the next steps amid the cost-of-living crisis.
The government faces tough decisions. British media reported that they were considering £50 billion in tax increases and spending cuts, more than estimates of the hole in the budget.
Interest rate futures show investors are much less worried about inflation than they were just a few weeks ago with bank rate expected to peak at about 4.75 per cent in 2023, down from more than 6 per cent before the sudden end of "Trussonomics".
During the MPC meeting, the bank will confirm its inflation expectations for the longer term, which are likely to show that the cost of living will be much higher than its 2 per cent target next year.
James Smith, developed markets analyst at ING, also had a downbeat prediction for the bank's latest economic outlook.
"The new set of forecasts due, which crucially are based on market interest rate expectations, are likely to be dismal ― showing both a deep recession and inflation falling below target in the medium term," he said.
"That should be read as a not-so-subtle hint that market pricing is inconsistent with achieving its inflation goal."
The bank’s plan to start selling some of the bonds it bought since 2009 to support the economy will also ease some of the pressure to raise rates.
Deutsche Bank said the planned £40 billion worth of sales over the next year were equivalent to about 25 basis points of rate hikes.
But Mr Goodwin at Oxford Economics warned of potential dangers in the plan.
"There is no pressing reason to kick off quantitative tightening and bond sales run the risk of triggering renewed turmoil in the gilts market," he said.
