The Bank of England is expected to keep interest rates on hold at 5% after what experts say will be one of the most difficult decisions of recent times.

With growth slowing markedly and inflation rising sharply, opinion is divided on the Bank's Monetary Policy Committee (MPC) about how to respond.

Although the bulk of members More Liechtenstein tax evasion cases in Germany ...
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The MPC will study the latest inflation and growth data before deciding.

Slowing economy

Most evidence points to annual consumer price inflation rising above 4% when July's figure is published next week.

Soaring food prices and fuel bills drove inflation to 3.8% in June, well above the government's 2% target.

Some economists feel inflation could top 5% before the end of the year.

At the same time, activity is slowing in all key sectors of the economy, business confidence is waning and falling house prices and tight credit conditions have dented consumer spending.

The economy grew just 0.2% in the second quarter and, on Wednesday, the International Monetary Fund once more revised down its forecast for UK economic growth this and next year.

It now expects growth of 1.4% this year and 1.1% in 2009, although the government still expects the figures for both years to be 2% or above.

Given the rising inflationary pressures, the IMF said there was little scope for the Bank to ease borrowing costs at this time, despite calls for measures to stimulate the economy and help homebuyers.

Indeed, many economists believe that if there is any change, it will be in an upward direction.

"It is not inconceivable that rates could be either raised or - less likely - cut," said Howard Archer, chief economist at Global Insight.

In their deliberations, MPC members will be armed with the latest forecasts for inflation and growth to be published in the Bank's forthcoming quarterly inflation report.

'Wait and see'

The minutes of the MPC's last meeting revealed a growing split with David Blanchflower continuing to argue for a rate cut in order to ward off a possible recession and Timothy Besley calling for a hike.

"The three-way split in the MPC's voting in July encapsulates the predicament that the Bank is in over a deepening and widening economic slowdown, yet elevated and still rising inflation," Mr Archer added.

But he believes caution will carry the day, given the current uncertain economic climate.

"We suspect that most MPC members are still firmly in "wait and see" mode and in no hurry to move interest rates."

(BBC)

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