Today's Bank of England decision likely to be neutral

The Bank of England, monetary policy committee (MPC) will finish a 2 day policy meeting at midday.
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.

UK inflation rises above expectations

The Bank of England's target measure, CPI inflation, increased to 3.4 per cent, up from 3 per cent in February mainly due to surging fuel prices as the price of oil moved above $80 a barrel. This means it is now the fourth month that CPI inflation has remained above the Bank's 2% target. Core inflation, which takes out the impact of food and energy costs, also moved up from 2.9% to 3% and RPI (Retail Prices Index) inflation, which includes housing costs, also rose to 4.4 per cent in March from 3.7 per cent. The average cost of a litre of petrol is now 120.9p compared to 95.2p in the same period in 2009, according to the AA.

This may mean that the BOE may move to tighten interest rates from the rock bottom 0.5% level sooner than expected if the GDP numbers due Friday are also robust