The Bank of England kept interest rates at a record-low 0.5 percent on Thursday, a decision which was no surprise to economists but probably conceals a vigorous debate about whether Britain is at greater risk from slow growth or high inflation.
As usual the BoE made no comment on the economy in its terse policy statement, which also confirmed that the central bank was making no change to its 200 billion pounds ($317 billion) of quantitative easing asset purchases.
More clarity on the decision will come next Wednesday, when the central bank publishes a quarterly update to its growth and inflation forecasts, which the nine-member Monetary Policy Committee had access to when reaching today's decision.
It was very much as expected. The focus is going to be on the Inflation Report next week where markets will be looking to assess if there has been any change in the tone on the outlook for policy, said UBS economist Amit Kara.
Our sense is that the message will be very similar to the one that Mervyn King gave at the Treasury Select Committee, which is really one of caution and 'give growth a chance'.
Although consumer price inflation at 3.2 percent is well above the BoE's 2 percent target, most policymakers view the factors that pushed it up -- sterling weakness, higher sales tax and higher oil prices -- as one-offs that will fade away.
Most economists predict growth will slow from the unexpectedly strong 1.1 percent recorded between April and June because of looming government spending cuts, weak European demand for UK exports and banks' continuing reluctance to lend.
None of the 61 economists polled last week expected a change in policy, and most did not expect a rise in interest rates until April next year at the earliest -- a view which the latest decision appeared to do little to change.
Sterling and gilt futures barely moved after the policy announcement, despite 10-year gilt yields edging to a 15-month low earlier in the session.
The BoE cut interest rates to 0.5 percent in March 2009 during the depths of Britain's recession, and launched a programme of quantitative easing, buying 200 billion pounds of assets -- mostly gilts -- by February 2010 to pump money into the economy.
SENTANCE ALONE AGAIN?
Minutes of Thursday's decision will only be published on August 18. Last month's decision surprised many economists as the MPC discussed looser policy for the first time since February.
Former British Airways economist Andrew Sentance was the only voice calling for higher interest rates in June and July. This month he is likely to have felt vindicated by an unexpected 1.1 percent surge in second-quarter GDP growth last month.
August's inflation report forecast is also likely to suggest the BoE will miss its CPI target throughout next year, in contrast to May when it forecast consumer price inflation would sink below target at the start of 2011 and stay there for the next 2-1/2 years.
Late last month both BoE Governor Mervyn King and Chief Economist Spencer Dale said a recently announced January 1 rise in value-added tax to 20 percent from 17.5 percent will make it unlikely that inflation will return to target until 2012.
However, this does not mean King and Dale will have argued for higher rates this month. Tighter policy typically takes more than a year to have an effect on inflation, making it an ineffective tool to combat one-off rises in prices.
Instead, most policymakers appear more worried about a possible fall in demand next year when 25 percent government spending cuts start to take effect and banks must repay nearly 200 billion pounds of emergency BoE loans taken out during the credit crunch.
August's meeting was the first to include former economic think tank director Martin Weale, the replacement for long-serving MPC member Kate Barker, who stepped down after May's meeting.
(Reporting by David Milliken, editing by Mike Peacock)