Inflation and Housing Woe Give Mervyn Dilemma on Interest Rates; Split Choice: Bank Governor Mervyn King and His Committee Must Balance Rising Fuel and Food Inflation with Plunging House Prices

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Byline: HUGO DUNCAN

THE BANK of England meets this week to set interest rates for Julyagainst a backdrop of soaring inflation and slowing economic growth. It is atoxic mix which threatens to plunge the British economy into crisis.

The Bank and its Governor Mervyn King are desperate to bring inflation backunder control in the face of rising fuel and food prices with hawks consideringan increase in rates. Doves are more concerned about the sharp slowdown ineconomic growth and the growing threat of a stagflationary recession.

The Bank cut rates three times between December and April to 5% but has been onhold since.

Economists reckon it will leave rates unchanged again on Thursday as it weighsup the twin threats to the economy of inflation and slowing growth.

Voting patterns will be heavily scrutinised when the minutes of the meeting arepublished later this monthwith particular attention given to Spencer Dale, a new member of the monetarypolicy committee. The City wants to know whether he is a hawk or a dove.

The two-day meeting, which kicks off on Wednesday deep in Threadneedle Street,will be a lively affair with the MPC discussing these major issues:

INFLATION The main objective of the Bank of England is to keep inflation undercontrol at the 2% target set by the Government.

Inflation is currently running at a heady 3.3% and looks set to rise above 4%in the coming months driven by rising fuel and food prices. This is a majorconcern to the Bank and its Governor, the self-confessed "inflation nutter"whose voting style is often seen as hawkish.

King was last month forced to write a letter to the Chancellor to explain whyinflation was so far above target. With inflation rising, the MPC willseriously consider raising rates to bring it back under control. In the letter,King told Alistair Darling: "The MPC remains determined to set interest ratesat the level required to bring inflation back to the 2% target."

UNEMPLOYMENT Unemployment numbers are relatively steady, but there's no doubtwhich direction they are travelling. In the three months to April, the mostrecent figures, the jobless figures rose by 38,000 to 1.64 million.

That took the unemployment rate up by 0.1% to 5.3%, which is not awful, but isenough to make workers nervous.

This may explain why employees have been willing to accept lower pay increases.Average earnings rose 3.8% in the year to February, down from 4% previously.Lower City bonuses are reflected in those figures, but they also indicate lowerpay rises across the board.

John Philpott of the Chartered Institute of Personnel and Development says:"Employers are still hiring and there is still no sign of a widespread increasein the firing rate." There are nearly 30 million Britons in workthe highest number on record..

GDP The economy grew at an impressive 3% last year but has slowed sharply sincethe credit crunch. …