The markets expect the committee to leave its key interest rates unchanged at 0.5%. But the BOE may want to stamp out any risk of inflation getting out of control with a preemptive strike to say 0.75%.
Consumer price inflation rose to 3.7% in December, versus a BOE target of 2%. The rate is expected to move to 4%-5% over the course of 2011 due to rapidly increasing commodity prices and the rise in VAT to 20% (from 17.5% in January).
The committee is faced with a difficult challenge trying to stifle inflation but not kill of economic recovery completely. A package of austerity measures is kicking in, the VAT rise being the key one, which will dent consumer confidence. At 8%, unemployment remains stubbornly high and disposable income is on a downward spiral as fuel and basic food costs move up.
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