The Bank of England has radically raised its inflation forecast, warning that UK price rises could peak at 4% in the months ahead.

The Bank hiked its forecast for peak inflation in its latest Monetary Policy Report published on Thursday. It said price rises were set to hit 4% in the final quarter of 2021, before falling back.

The forecast is bad news for savers, who will see the purchasing power of their cash piles diminish with interest rates stuck at rock-bottom levels.

The 4% forecast is a significantly higher than the Bank's previous estimate of 2.5% peak inflation, made in May. Inflation hit 2.5% in June, forcing a rethink at Threadneedle Street.

Despite rising inflation expectations, the Bank's Monetary Policy Committee (MPC) kept the UK's interest rate at a historic low of 0.1% on Thursday. Higher interest rates are the typical policy tool used by central banks to rein in inflation, encouraging people to save rather than spend.

Rate setters stood pat because of a conviction on the MPC that inflation is being driven by temporary factors that will fade over the next 12 months. 

"The Committee’s central expectation is that current elevated global and domestic cost pressures will prove transitory," the Bank wrote.

Furlough has distorted the jobs market and a reopening boom has given workers more power over wages as employers hunt for staff. Both factors are likely to subside, easing inflationary pressure from higher wages.

Higher prices are also being driven by higher costs, amid a global shortage of goods such as semi-conductors and a surge in demand for construction materials. Shipping costs have spiked, reflecting the boom in demand.

The Bank of England said supply chain issues were likely to ease as more of the global economy reopened and conditions began to normalise.

"Its two-year ahead inflation forecast, 2.07%, only marginally exceeded the 2% target, while its three-year-ahead forecast of 1.88% was the lowest since Q4 2012," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

"The Committee believes that a combination of well-anchored inflation expectations and medium-term fiscal tightening will ensure that CPI inflation falls back to and then slightly below the target, even if monetary policy remains historically very loose."

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