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Bank of England faces dilemma

Yesterday's confirmation that the Bank of England MPC expects to retain UK base rates at 0.5% for the foreseeable future was not a surprise for the UK economic arena. However, a report expected next week is set to show that while inflationary pressure in the UK is growing in the short to medium term, the economic recovery is stalling. Against this background the Bank of England faces a very difficult and challenging period over the next 12 months. So what are the options?

Finding a balance between supporting the UK economy, by maintaining the supply of "cheap finance", and ensuring that inflation does not move out of control is near impossible. If the Bank of England maintains base rates at 0.5% this will feed inflation yet if the Bank of England increases base rates to fight inflation then this could push the UK economy back into recession. Charles Goodhart, a member of the MPC, has even gone public with his description of the current environment and the "horrific" dilemma which the Bank of England faces.

While the forthcoming export ban of grain from Russia may seem fairly irrelevant in the overall picture this could actually make the inflationary situation a whole lot more difficult in the short term!

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