Bank of England policymakers are expected to cut interest rates on Thursday but updated forecasts from the central bank are likely to indicate an increasingly tough task as inflation picks back up, according to economists.
A reignition of energy prices and increasing labour costs threatened a "more difficult phase" for the Bank's monetary policy committee, said Citi economist Benjamin Nabarro, after fading consumer prices justified rate cuts last year.
Inflation will increase to around 3.5% by April as a result, he predicted, compared to December’s consumer price index reading of 2.5%.
“This is even as the labour market deteriorates,” Citi said, meaning the MPC will carry out a “cautious” rate cut from 4.75% to 4.5%.
Barclays economists also expect the MPC to cut the base rate by a quarter of a percentage point at this week's meeting but predict that there will not be full agreement among the committee, with a 7-2 vote split.
Some economists think there could be hints this week that the Bank could lower interest rates again in March.
"Until now, the BoE has cut at alternate meetings, but a stagnating economy and declining employment argue for more urgent action," said Andrew Wishart at Berenberg.
Noting that December payroll data showed further job losses, he said it would be "sensible for the BoE to lower interest rates to prevent a larger drop in employment", while noting that rising wages will be a concern for the committee and not something that monetary policy can directly affect.
There are not likely to be any "material" changes in the Bank's forecasts, the Barclays team added, with the MPC expected to keep their options open and stress uncertainty in the outlook given global and domestic developments and "the potential for noise" in the most recent data.
Thursday’s meeting comes after gross domestic product figures showed the UK economy flatlining towards the end of last year, but inflation eased to 2.5% from 2.6%.