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"The question now is what policy may do to offset the impact on
both inflation and the real economy," Benjamin Nabarro said in a
note to clients.
Consumer price inflation was last above 18% in 1976.
The front-runner to become Britain's next prime minister, Liz
Truss, was likely to come up with measures to support households
that would have a limited offsetting impact on headline
inflation, Nabarro said.
With inflation now set to peak substantially higher than the
Bank of England's 13% forecast in August, its Monetary Policy
Committee was likely to conclude that the risks of more
persistent inflation have intensified, the note said.
"This means getting rates well into restrictive territory, and
quickly," Nabarro said.
"Should signs of more embedded inflation emerge, we think Bank
Rate of 6-7% will be required to bring inflation dynamics under
control. For now though, we continue to think evidence for such
effects are limited with increases in unemployment still more
likely to allow the MPC to pause around the turn of the year,"
he added.
The BoE announced a rare half percentage-point interest rate
increase earlier this month and investors expected another big
move when the MPC makes its next scheduled monetary policy
announcement on Sept. 15.
Nabarro said he expected Britain's retail price index - which is
used to set the return on inflation-linked bonds - would peak at
over 20%.
(Reporting by William Schomberg; editing by David Milliken)
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