Bank of England rate-setters are all but certain to hold fire on policy moves again this week as the new coalition Government’s emergency Budget looms.
The Bank’s Monetary Policy Committee (MPC) meets on Wednesday but is likely to leave rates at 0.5 per cent and its £200 billion programme to boost the money supply unchanged after its two-day meeting.
With Chancellor George Osborne’s first Budget due on June 22, the MPC will want to consider the impact of likely tax hikes and spending cuts on the inflation outlook before making its next move.
The committee will also weigh up recent stock market turmoil amid worries over debt defaults by some countries - as well as the threat of a double-dip recession as nations across Europe tackle huge deficits.
Bank Governor Mervyn King has said he was “pleased” so far at the coalition’s commitment to tackling the nation’s dire public finances, with £6.2 billion in spending cuts outlined so far.
The MPC has not moved policy since last November - and another round of cuts could mean rates stay lower for longer to shore up a fragile recovery after growth of just 0.3 per cent in the first quarter of 2010.
“Clearly an aggressive fiscal tightening could reawaken fears over demand and prompt the committee to remain in ‘wait and see’ mode for longer,” Investec chief economist Philip Shaw said.
But the MPC has to strike a balance between protecting recovery and risking the return of inflation if rates stay low for too long.
Inflation hit a 17-month high of 3.7 per cent in April, although Mr King believes it will fall back to its 2 per cent target “within a year”.