Bank seen steering steady course through fiscal fog

The Bank of England looks set on Wednesday to signal rates will stay put for the time being, making few tweaks to its quarterly forecasts, as policymakers wait for clarity on the government and Europe's debt crisis.

Wrangling over who will govern the UK after last week's inconclusive election has placed the biggest question mark over policy, because the scale of any spending cuts or tax rises needed to cut government borrowing are still unknown.

That, coupled with concerns about the potential fall-out from the southern European debt crisis on Britain's economy, may make policymakers reluctant to vastly alter their growth and inflation outlook, and encourage them to keep policy steady for some time to come.

"I very much doubt the Bank will want to move rates up in the near term, especially given what's happening in Europe, and a lot depends on what will come from an emergency budget, should we get one" said George Buckley, economist at Deutsche Bank.

"They're in limbo, they'll need to wait until the end of the year at least."

The new government will have to push through the toughest measures in decades to curb a budget deficit running at over 11 percent of GDP.

The Conservatives have said they would produce an emergency budget within 50 days of entering government.

Bank Governor Mervyn King is reported to believe that the scale of the austerity measures would spell political disaster for any administration - and he is likely to be quizzed about that at Wednesday's news conference.

BALANCE OF RISKS

The central bank has held borrowing costs at a record low 0.5 percent for more than a year, and pumped 200 billion pounds of new money into the system to help drag the nation out of its deepest downturn since World War II.

But while the economy has started a modest recovery, consumer price inflation has jumped to well above the central bank's 2 percent target in recent months, driven by a rise in value-added tax, higher commodity prices and a weak currency.

Some members of the Monetary Policy Committee have expressed concern that high inflation could become entrenched in people's expectations, leaving open the possibility of a small upward revision to the inflation profile over the two-year horizon.

One argument against that, however is that inflation this year was almost exactly in line with the predictions in February's inflation report, when it was also forecast to subside to around 1.2 percent by 2012.

"In general, they're likely to note that inflation was surprisingly high through the course of 2009 and that might spill over into upside inflation risks in its projections" said Philip Shaw, economist at Investec.

But he said such concerns were likely to be offset by worries about the Greek crisis and the impact of fiscal tightening on the economy over the medium term.

"The overall conclusion is that rates remain on hold for now and that the downside risks to the UK, and indeed the global recovery, have not abated sufficiently."