The Bank of England’s interest rate verdict next week will be delivered on the day of Britain’s annual Maundy Thursday celebrations — traditionally an occasion for the monarch to dole out alms in red and white purses to a lucky few.

For the rest of us, though, the bigger question on April 5 will be whether the Bank’s Monetary Policy Committee will be taking cash away from an unlucky majority of the nation with a new rise in interest rates.

City economists are split over the MPC’s likely decision. Although relatively few expect a rate rise this month, most see a risk of a move, and expect borrowing costs to rise by May.

In February, the MPC’s chief hawks retreated after a burst of weak data combined with financial market turmoil just ahead of its decision. But the ground has since tilted, so that analysts believe the hawks’ talons may reemerge. Here, then, is our monthly preview of the issues:

Growth and activity: Strong, but easing off?
A key factor in last month’s decision to peg rates was an unexpected 1.8 per cent slump in January’s retail sales, which fuelled worries about consumer demand. Since then, however, February sales have rebounded to rise by 1.4 per cent, while the January drop was revised to only 1.5 per cent, and other retail indicators have been strong. Business investment has also accelerated, to its fastest annual pace for eight years in the fourth quarter.

Q4 national accounts revised down GDP growth from 0.8 to 0.7 per cent, but with upward revisions to earlier quarters it left the economy’s annual pace of expansion unchanged at a robust 3 per cent.

Other data, such as yesterday’s services sector data, have shown some tentative signs that the momentum of growth going into 2007 has slackened somewhat, but most analysts see continued overall strength across much of the economy.

Costs and prices: medium-term pressures persist
The MPC’s March decision was made easier by an unexpectedly steep fall in headline consumer price inflation to 2.7 per cent in January, from 3 per cent in December. But Mervyn King, the Bank’s Governor, has said this news was “largely offset” by the subsequent rebound to 2.8 per cent in February.

At the same time, many MPC members have expressed anxieties over the emergence in surveys of evidence that companies are trying to push up prices, and increasingly believe that they can make these stick.

Inflation is still expected to fall back sharply this year as last year’s steep increases in energy costs drop out of the figures, and the impact of big cuts in utility bills this year is felt. But the Bank remains edgier over the medium-term outlook. Some of the MPC are fretful over rapid growth in the money supply as well as elevated expectations of future inflation. The pound’s trade-weighted index is also 2 per cent down from the time of the February Inflation Report.

There remains little sign so far, however, of a feared jump in pay pressures with headline average earnings growth still subdued at a 4.2 per cent annual rate.

International economy: Edgy
Since the heavy losses at the start of the month, stock markets have largely stabilised, with the FTSE 100 index recovering all of its lost ground, although investors remain wary, and Mr King has given warning the more volatile conditions could linger.

Fears about US prospects have increased after more bad news over the toll from America’s housing market slump, highlighted by the collapse of some sub-prime mortgage lenders. At the same time, however, news from across the Channel in the eurozone has been much more positive.

Verdict: Brace for a move
The largely stronger economic data seen in recent weeks coupled with the hawkish tone of the five MPC members who gave evidence to MPs this week appear to have substanstially increased the danger of a rate rise next week. A no change verdict is likely to prove only a temporary reprieve since the MPC would then seem very likely to mark its tenth anniversary with a rate increase.

Bank thinking

Mervyn King, the Bank’s Governor, said this month that falling retail gas and electricity prices were likely to make inflation volatile. The news since February had not given a clear reason to change the MPC’s view that the risks to inflation are to the upside, he said.
His deputy, Rachel Lomax, said that migrant workers were raising the economy’s speed limit, allowing the economy to grow “that bit faster” without adding to inflation. Kate Barker said that there was a little more upward inflation pressure in the short term than might have been expected but that wages seemed to have risen only a little. Sir John Gieve was also upbeat on pay, saying: “I can’t yet see an increase in the level of wage rises this year. So far, so good.” But the hawkish Andrew Sentanceoffered a warning from history. “There is a risk of repeating the mistakes of 1987, when a loosening of monetary policy in response to falling stock markets was overdone and provided a further boost to the late1980s’ demand-led boom,” he said.

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