The Bank of England’s quarterly inflation report on Wednesday is expected to lower previous growth projections and predict higher inflation than the targeted rate of 2 per cent.
Experts expect the Bank to slash its May forecast for economic growth by full 1 per cent for the current and next year.
The Bank had predicted in May that the UK economy would growth 3.4 per cent in 2010 and 3.6 per cent for 2011, but the forecast was widely considered more optimistic than City forecasts.
The Office for Budget Responsibility has predicted a growth of 2.6 per cent for next year.
The Bank is also expected to forecast higher inflation for the next one and a half year as the VAT will be increased from January. According to City forecasts, inflation will remain above the banks target of 2 per cent for most of next year.
Speaking about the Bank’s forecasts, Simon Ward from Henderson Global Investors said, "You can't explain the size of overshoot relative to forecasts on commodity prices and VAT alone. They've also made errors in overestimating spare capacity and underestimating the impact of lower exchange rates."
Inflation stood above 2 per cent in most months since 2006. Inflation in June was recorded at 3.2 per cent on the Consumer Prices Index measure, while the Retail Prices Index inflation measure was recorded at 5 per cent.
The UK economy grew stronger-than-expected 1.1 per cent during the second quarter of this year, but the Bank wants to remain precautious about growth prospects.