Op-Ed: The Bank of England Should Make up Its Mind

As we enter the first full trading week of the second half of the year, the markets remain in a foul mood. Bad news on the stalled economic recovery leads to daily selloffs and good news is ignored.

In fact, when we get yet another Bank of England rate decision on Thursday leaving rates unchanged at an accommodative record low, don't expect a cheer in the Square mile. It will almost certainly be read as yet another signal that growth has broken down.

But when will UK interest rates become less predictable?

The Monetary Policy Committee is not set to raise the base rate from its current 0.5 percent level until the second quarter of 2011, according to a poll of economists conducted by Reuters last week.

But is the MPC any clearer about the UK economic outlook than the rest of us?

The answer, of course, depends on which member you ask. Andrew Sentance believes rates need to go up now to combat the worrying inflationary trends developing in the economy, this despite May's fall in inflation to 3.4 percent from its 17-month high in April.

Others are more willing to point to one-off factors in the stubbornly high inflation. And, as Monument's Stephen Lewis points out, another MPC member, Dr Adam Posen, recently concluded that there were special factors at work in pushing UK prices higher.

Lewis added that Posen gave the impression that "he still saw downside inflation risk in the fiscal austerity in the UK …but, if that risk were not to crystallize, he would be 'only too happy' to raise interest rates."

Analysts at Jefferies point to the rises in VAT (not the one penciled in by George Osborne but the one where Alistair Darling took it back up to 17.5 percent from 15 percent as of December 2009) as a major factor in the upside pressure on inflation.

"In the ONS's core measure, UK inflation has been running at 3 percent, exclude VAT and energy and the figure is close to 1 percent, a significant difference," they wrote.

In fact, if you add in the Osborne VAT rise to 20 percent in January next year, another 1.5 percent will be added to CPI, according to Jefferies analysts, which means Mervyn King will be writing more letters to the Chancellor explaining why this is no cause to panic.

Going into this week's MPC meeting on Thursday, its members appear as uncertain as the rest of us as to whether inflation or deflation is the greater risk.

Isn't it time the great and the good of the BoE made up their minds? Until they show us some conviction, what hope for investors and a resumption of market confidence?