What is Safari Forms Autofill Encryption Key & Should I allow this?

Safari Autofill uses Keychain to populate website login information. That information is encrypted.

Should I allow this?

Yes, assuming you want Safari to automatically provide login information for websites that require authentication. If you don't want to do that, you don't have to. When asked if you want to save that information for any particular website in Keychain, you can decline. You can also remove passwords that you may have saved in the past.

Read Manage passwords using keychains on Mac - Apple Support among other Apple support resource documents.

Thanks for that explanation.

Whilst I trust the companies I deal with, I do not trust the companies that run the websites when it comes to trawling systems to garner any sensitive information to sell on to data brokers.

Nor would I. Your concerns are warranted, and the persistent harassment to access Keychain does not strike me as normal. It's certain to be annoying.

It may be a question only Microsoft can answer, but before asking them (which I wouldn't wish upon anyone) one possible explanation might be the use of a VPN or iCloud Private Relay, both of which can encrypt and obscure the DNS records and IP addresses you're using to communicate with Microsoft's online services. Internet services like it tend to interpret such changes as an unexpected break in communication that invalidates previous credential requests and authorizations. Some websites will not work with them, as If Safari doesn't open a page or work as expected on your Mac - Apple Support explains.

This is only one possible explanation.