Right now, the economy appears on a knife edge, with the Bank of England seemingly stuck between a rock and a hard place
Inflation is much higher than its 2% target and it is expected to stay above it for some time to come - possibly even hitting 5% in the near future. The Bank risks losing some credibility if it does not start to target inflation soon - by increasing interest rates.
If interest rates were to rise, it could have a massive (negative) impact on the economy. Right at the time when people are worrying about their jobs and rising food and petrol prices, the last thing they need is higher mortgage payments.
It is a situation that is hard for the Bank to resolve because the factors pushing up prices are out of its control. The Bank cannot slow down the Chinese economy and make it use less steel. It cannot stop fires in Russia destroying the wheat crop, pushing up bread prices.
But it can show its intent and determination to tackle inflation and stop inflation expectations leading to higher wages. This is where things get difficult. Some members of the rate-setting monetary policy committee agree with the austerity measures - will they decide to increase rates? It’s probably unlikely in the next couple of months but don’t bet against it after the summer.