Bank faces dilemma over policy

Such opposing risks put Britain’s central bank in an unenviable dilemma and mean Thursday’s decision is the first since rates were cut to record lows in March 2009 when investors have felt in any real doubt about the outcome on rates.

News the economy contracted at the end of 2010 has encouraged analysts to stick with their view that the Bank will keep interest rates on hold until much later in the year. A poll last week showed only 21 out of 67 analysts thought rates would go up before the fourth quarter.

However, with pipeline price pressures building and the Bank’s credibility under threat, money markets are pricing in around a 20 per cent chance of a quarter point rise to 0.75 per cent this week, and a 100 per cent chance of such a move by May.

Interest rates have stood at 0.5 per cent since March 2009, when the Bank slammed monetary easing onto full throttle to protect the economy from the ravages of recession and deflation. Fast-forward two years and Britain’s problem is with prices rising.