LONDON: Bank of England policymakers are expected to keep interest rates at a record low 0.5 percent on Thursday in the first monetary policy decision of 2011 as Britain faces strong economic headwinds.
The bank's rate-setters kick off a two-day gathering on Wednesday, mindful that the nation's economic recovery might be hampered by tax hikes, deep spending cuts, soaring inflation and rising unemployment.
The BoE's nine-member monetary policy committee (MPC) has left its key lending rate at 0.50 percent since March 2009 as it seeks to strengthen recovery from a record-length recession.
Analysts also believe that the BoE will refrain this week from pumping more cash into the economy with fresh stimulus under so-called Quantitative Easing.
"The build-up of near-term price pressures has prompted a widespread re-think of when, and how far, interest rates will start to rise," said Capital Economics analyst Vicky Redwood.
"While a near-term rate hike certainly now looks more possible, we think that it would do little good and, for now at least, expect the MPC to continue to sit tight."
Inflation reached a higher-than-expected 3.3 percent in November, up from 3.2 percent in October, as soaring commodity prices resulted in record food and clothing costs, recent official data showed.
The BoE's key task is to keep annual inflation close to a target level of 2.0 percent.
But many forecasters are now predicting that inflation will breach 4.0 percent in the coming months as a result of domestic energy price hikes, rising commodity markets and the recent increase in sales tax.
"Concerns about near-term inflation are mounting," said ING economist James Knightley, whose group are forecasting 4.1-percent inflation by February.
"Even so, given the MPC's concerns about the resilience of the recovery, we expect policy to be kept on hold, with (the key) bank rate left at 0.50 percent and the stock of asset purchases unchanged at £200 billion."
The BoE launched its purchases, or QE programme, in March 2009 in an attempt to drag Britain out of a deep recession sparked by the global financial crisis.
Under QE, the bank created some 200 billion pounds (236 billion euros, 314 billion dollars) of new money by purchasing government bonds and high-quality private sector assets, but the radical scheme ended early last year.
Some economists predict that the BoE could soon decide to pump out more cash, with Britain expected to experience slower growth in 2011 amid massive cuts to public spending as the coalition government slashes a record deficit.
At the start of January meanwhile, Britain's VAT sales tax on goods and services was hiked to 20 percent from the previous level of 17.5 percent, adding fresh upwards pressure on inflation.
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