The bank with the ‘toughest job in the world’ announces its interest rate decision today amid a climate of extreme hardship. Mervyn King and the MPC are expected to keep rates on hold at 5% as the delicate balancing act of controlling inflation and stimulating growth lingers. While I doubt we will see a cut today the signs of loosening over the coming months are becoming all the more clear.

The main driver behind the world’s inflationary problems has been the vast increase in commodity prices and the subsequent effect on consumers’ pockets. With oil prices returning to the $100 a barrel area and grain price volatility starting to calm we can expect this ‘imported inflation’ to slacken as well. A fall in prices should therefore allow the MPC the scope to cut; we forecast this to be in November.

Yesterday was hard. Sterling posted yet another all time low against the euro and looked listless against the dollar. Britain’s service sector declined for the fourth successive month however at a slower rate than economists expected. The picture is still poor however as all 3 of the UK PMI releases this week have shown contraction. The recent OECD forecast of a recession in the UK by the end of the year is looking all the more sagacious.

In all the hubbub of the UK economy the ECB decision has become somewhat second tier. We also expect a hold from Frankfurt followed by assertions in the press conference that although prices are starting to fall inflation must be watched carefully.

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