The Monetary Policy Committee (MPC) of the Bank of England announced the decision on interest rates following its March meeting yesterday (Thursday). The MPC voted to maintain Bank Rate at 0.5 per cent, the level it has been at for two years now, and to maintain the asset purchasing programme (quantitative easing) at £200 billion.

The minutes of the meeting will be released on 23rd March and, following the last meeting, analysts will be looking for signs of how soon an interest rate rise can be expected; many are predicting a rise in May. The last set of minutes showed a further widening of the difference in opinion amongst the nine-member committee with three voting for a rate rise and one for expanding quantitative easing. The divergence between those who wanted to see a rate rise also widened with two voting for a 0.5 per cent increase and one for a 0.25 per cent rise.

Inflation is way above target and the Governor of the Bank of England, Mervyn King, has made it clear that expectations are that the consumer prices index (CPI) will rise to around 5 per cent before coming back down to its target of 2.0 per cent next year. Temporary factors like the rise in value added tax (VAT), increases in commodity prices and fuel duty will eventually fall out of the index and together with the spare capacity in the economy will bring down price pressures, according to the Bank's forecasts.

The medium term danger is still that the higher inflation being experienced at the moment leads to expectations of future inflation and changes in behaviour of individuals and firms in negotiating wages and setting prices. If this happens then the current relatively high inflation could lead to spiraling inflation which would require more serious policy 'medicine', and if interest rates did have to increase significantly the economic recovery could be compromised.

The MPC, therefore, faces a difficult few months but it does now seem likely that interest rates will rise sooner rather than later.