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Inflation to hit government target – at the expense of growth and employment

The government’s inflation rate is forecast to drop to 4.75% in the last three months of the year by the Bank of England.

The Bank raised interest rates rapidly throughout the year in a bid to curb inflation, though it held interest rates at 5.25% yesterday, the second time it held base rates in a row

Sarah Coles, head of personal finance, Hargreaves Lansdown, said: “Inflation is set to hit the government’s target – but it’s going to hurt…with growth stagnating, and unemployment rising. It’s no wonder the Bank kept the engine of interest rates idling at today’s meeting. A rise under these conditions would risk pushing the economy into dangerous territory.

“However, the Bank made it clear that there are still real risks on the upside for inflation. It said it’s likely to take longer for inflation to unwind than it did for it to build. It also warned that the oil prices could push higher, depending on events in the Middle East, which could drive another unwelcome upswing in inflation.

“It might mean we end up with the worst of all worlds – stagnation, unemployment, inflation and even higher interest rates. It’s worth stressing that at the moment this is a possibility rather than a probability, but it’s why the Bank has left the door open for more rate rises if needs be.”

The Bank estimated that so far we’ve only experienced half the eventual impact of interest rates on GDP.

Growth is therefore likely to be almost entirely stagnant in the months ahead, before eventually rising slightly to 0.25% in 2025 and 0.75% in 2026.

From 4.75% inflation is set to keep falling – to 4.5% in the first three months of next year and 3.75% in the following three months – hitting 3.4% in the last three months of 2024.

Further out it’s likely to fall more slowly than the bank had expected – hitting 2.2% in two years and 1.9% in three.