The general public now expects UK inflation of 3.3% over the coming year - a record forecast which will fuel fears that the Bank of England will be unable to cut interest rates by enough to ward off a painful economic slowdown.

The general public now expects UK inflation of 3.3% over the coming year - a record forecast which will fuel fears that the Bank of England will be unable to cut interest rates by enough to ward off a painful economic slowdown.

Rising inflation expectations have been highlighted by the Bank's Monetary Policy Committee as a massive barrier to the further interest-rate cuts which are viewed by the City as the key to limiting the scale of the inevitable slowdown in UK growth.

Bank Governor Mervyn King warned in a speech in January: "If inflation expectations were to pick up in the wake of a rise in inflation this year, then only a more prolonged slowdown would allow inflation to return to target."

The inflation attitudes survey, published yesterday by the Bank and private sector research organisation GfK NOP, sharpens further the horns of the dilemma upon which MPC members find themselves.

The median expectation of the annual consumer prices index inflation rate over the coming year surged from the previous all-time peak of 3%, recorded in the last quarterly survey of inflation attitudes, to 3.3% when people were asked again last month.

As well as being the highest since the survey was first conducted in November 1999, this is way above the 2% target set for the Bank by the Treasury.

It is also far above the latest 2.2% figure for annual CPI inflation - for January. Perhaps worryingly, in the context of King's January speech, expectations of the future pace of consumer price rises have surged even before the spike in annual CPI inflation to more than 3%, which is forecast by the MPC to occur around mid-year.

Paul Dales, at consultancy Capital Economics, said: "For now this (survey) will clearly spook the MPC, increasing the chances that interest rates will remain on hold in April and perhaps even May too."

The MPC has cut UK base rates by a quarter-point twice so far this cycle, on December 6 and February 7, to take them to 5.25%.

However, one top banker told The Herald this week that inflationary dangers were likely to mean the MPC would not be able to cut rates again for months, even though economists have expressed hopes of another reduction in May.

This view that the MPC might find itself shackled for a while on the interest-rate front, by surging inflation expectations and evidence that companies are hiking prices at the fastest pace in a decade, is particularly worrying given wholesale credit markets remain tight.

MPC members have acknowledged such credit-market tightness means any given level of base rates is more restrictive from an economic activity perspective than it would be otherwise.

The global credit crunch, which has its roots in massive default on home loans by US households served by the sub-prime mortgage sector, is expected to act as a significant brake on the UK economy.

The US, hit by the credit crunch and the impact of a housing market slump in the world's largest economy, is believed by an increasing number of experts to be in recession already.

Figures yesterday from the American Commerce Department showed a much greater-than-expected 0.6% drop in US retail sales last month - highlighting the impact of the housing market troubles on consumer spending and reinforcing fears that the US is now in recession.

Central banks on Tuesday provided a significant fillip to world stock markets by promising to inject hundreds of billions of dollars of extra liquidity into credit markets.

The UK's FTSE-100 index of leading shares made solid gains on Tuesday and Wednesday, but lost ground again yesterday as credit market fears came to the fore again. It slipped 84.0 points to 5692.4, having tumbled to an intra-day low of 5628.9.

Sentiment was hit yesterday by news that an affiliate of US-based buy-out firm Carlyle Group had defaulted on about $16.6bn of debt and expected its lenders to seize remaining assets, as the global credit crunch tightens around leveraged investors.

Carlyle Group said Amsterdam-listed fund Carlyle Capital Corp was unable to reach a deal with lenders, and it therefore expected those lenders to take possession of the fund's remaining residential mortgage-backed securities assets.

Carlyle claimed it had worked "exhaustively" to assist Carlyle Capital and had taken "extraordinary measures" to help it through its liquidity crisis.

Wall Street got off to a sticky start but recovered later. The Dow Jones Industrial Average finished 35.50 points higher at 12,145.74, on hopes that the end of credit crisis-related writedowns at big banking groups might be close.

These hopes were based on a statement from international ratings agency Standard & Poor's that "the end of write-downs is now in sight for large financial institutions".

This statement overshadowed a revised estimate from S&P that write-downs of sub-prime asset-backed securities could reach $285bn globally, up from a previous $265bn projection.

The credit market crisis started in earnest last summer - triggered by trouble in sub-prime mortgage-backed securities. US home loans had been parcelled up in the form of securities, backed by the income streams from the underlying mortgages, and were sold to institutions around the globe.

Yesterday's Bank of England survey showed the public's median belief is that UK inflation is currently 3.9%, the highest figure recorded for this question. This was up sharply from the previous all-time peak of 3.2%, in last November's survey, and 1.7 percentage points higher than the actual rate of annual CPI inflation in January.

Dales said: "The further rise in the Bank of England's measure of the UK public's inflation expectations from 3.0% in November to a record high of 3.3% in February will boost the MPC's fears that high inflation is becoming embedded in the system. Some of the rise may be a temporary impact from the latest recent round of utility price hikes and rises in food inflation. But the danger is that inflation expectations will remain high once these effects start to fade, as they did last year."

However, he expressed hopes that sharp falls in the old all-items retail prices index measure of inflation later this year "and a prolonged economic downturn" would eventually weigh on inflation expectations.

Howard Archer, chief UK economist at consultancy Global Insight, said the survey "will make pretty uncomfortable reading for the central bank and reinforces the belief that interest rates will be trimmed only gradually, in the near term at least".

Archer added: "It significantly dilutes the case for the Bank of England to cut interest rates again as soon as April.

"The Bank of England regards containing inflation expectations as a key factor in holding down consumer price inflation over the medium term. In particular, the Bank of England is particularly concerned that a near-term sharp spike up in inflation resulting from higher energy, food and import prices will lift inflation expectations and thereby affect the medium-term behaviour of price and wage setters. The last thing that the Bank of England wants to see is a very damaging wage-price spiral developing."