Bank report puts focus on economy

The outlook for Britain’s ailing economy and the future path of interest rates will be in sharp focus when the Bank of England publishes its latest quarterly report.

The City will be looking for a clearer insight into when policymakers might lift rates from historic lows of 0.5%, while the strength of the recovery will also be under the spotlight after the shock contraction at the end of 2010.

The report follows UK inflation figures which revealed a rise to 4% in January – with Bank governor Mervyn King admitting in a letter to the Chancellor that there were “real differences of view” among the Monetary Policy Committee (MPC).

Since the Bank’s last report in November, official figures revealed the UK economy unexpectedly shrank by 0.5% in the final quarter of 2010 and inflation has continued to soar above target.

The consistently high inflation – now twice the Government’s 2% target – has increased pressure on the Bank of England to consider an interest rate hike. But the shock growth figures dampened this prospect and highlighted the fragility of the economy.

There are fears the UK is teetering on the brink of so-called stagflation, when sluggish growth and high unemployment combine with soaring prices.

In a speech last month, the Governor said the UK was facing the biggest squeeze on living standards since the 1920s as inflation moves towards 5% in coming months and wage growth slows down.

Philip Shaw, economist at brokers Investec, said: “The Bank of England quarterly inflation report will give us a better idea of the way that members view inflation risks and therefore should shed some light on interest rate prospects.”

On Tuesday the Governor confirmed expectations for inflation to pick up to between 4% and 5% over the months ahead. Nevertheless last week policymakers voted in favour of holding rates and keeping quantitative easing at its current level of £200 billion.

Bank policymakers have insisted the stubbornly-high cost of living is due to temporary price shocks, such as soaring global commodity prices and the VAT rise last month, and that inflation will drop back in 2012.