Bank to set tone of fiscal policy with signals on rates and inflation

The financial markets are braced for the start of a turbulent week that could set the tone of the UK's monetary and fiscal policy for the months to come.

The financial markets are braced for the start of a turbulent week that could set the tone of the UK's monetary and fiscal policy for the months to come.

At noon the Bank of England will announce its decision on interest rates that it was forced to delay from last Thursday to avoid conflict with the election. All but two of City economists polled by Reuters expect the base rate to stay on hold at 4.75 per cent for the ninth month in a row.

Economists believe the downturn in consumer spending and borrowing puts the prospect of a rate cut on the table. "A future rate rise would risk overkill," said Andrew Smith, chief economist at KPMG.

On Wednesday Mervyn King, the Bank's Governor, will lay out the Bank's forecast for growth and inflation at the publication of its quarterly inflation report. Its February report showed inflation breaking through the 2 per cent target at the end of its two-year forecast horizon, putting the markets on notice for a further rate rise. "The Bank is likely to emphasise the downside risks, raising the negative skew of the forecast, and suggesting it wants to see evidence of recovery in spending and a more solid global backdrop before it will raise rates," said Malcolm Barr, UK economist at JP Morgan.

New figures today showed a rise in consumer confidence, according to research by Experian, although a separate report from Propertyfinder website showed homebuyers had become more gloomy.

Later today the Office for National Statistics will publish figures on output and inflation in the manufacturing sector.

Finally, at the end of the week there is an informal meeting of European finance ministers that will enable the Chancellor to push ahead with issues such as debt relief for Africa ahead of Britain's presidency of the EU that begins in July.