Figures this week showed that consumer price inflation rose to 2.7 per cent last month, the 42nd successive month it has been above its 2 per cent target. Many economists expect it to rise above 3 per cent next month, which would require new Bank governor Mark Carney to write to the chancellor explaining what he intends to do about it.
The answer might be: "nothing". Philip Shaw at Investec, among others, thinks the Bank could resume quantitative easing in August.
One reason for this is that above-target inflation is due to rises in government-controlled prices; increases in university fees, rail fares, gas and electricity prices account for 0.8 percentage points of the 2.7 per cent inflation. Monetary policy can't reduce these. Also, the Bank expects inflation to fall below target by the summer of 2015. This allows it to loosen policy while claiming to be targeting inflation.
Many economists, though, are sceptical of this. "It's unlikely that we will see inflation move back to the 2 per cent target in the foreseeable future," says Andrew Goodwin of Ernst & Young's Item Club. For some Monetary Policy Committee members, this is an argument against loosening policy. In a recent speech, Ian McCafferty worried that financial markets thought the Bank was becoming more tolerant of high inflation, which matters because it's widely thought that inflation expectations can be self-fulfilling.
The policy outlook should become clearer in August, when the Bank publishes its assessment of whether US-style policy - a promise to keep rates low for a specified period and the use of "intermediate thresholds" such as a target for the unemployment rate - can be used in the UK. David Owen at Jefferies Fixed Income says that, if the Bank does adopt an unemployment target, interest rates might not rise until at least 2015.
Economists hope that the promise of continued loose policy will encourage businesses to invest and create jobs. But minutes of the latest monetary policy committee show that some members fear it "could lead to an unwarranted narrowing in risk premia" - that is, to asset price bubbles and financial instability. It has long been the case that, when companies are loath to invest in the real economy, loose monetary policy can lead to disruptive speculation.
