The Bank of England will attempt to strike a delicate balancing act this week as rate-setters pick their way through the twin threats of rising inflation and sliding growth.
Its Monetary Policy Committee sanctioned an extra £50bn in quantitative easing to help spur on the recovery in February. But the current money-printing programme is coming to a close and the Bank must decide whether to extend its efforts after the UK fell back into recession.
The vote also comes in what could be a turbulent week for the eurozone as markets react to today's elections in recession-blighted Greece and France, where Nicolas Sarkozy is set to lose his grip on the Élysée Palace.
Until two months ago the City was convinced the MPC would vote for an extra £25bn in QE, although now just five out of 70 economists surveyed believe the Bank will actually press ahead and vote to print more money on Thursday.
March's surprise rise in the Bank's Consumer Prices Index inflation benchmark to 3.5 per cent – nearly double the 2 per cent target – caught markets off guard, while the recent utterances from the nine-strong committee have been hawkish.
Deputy Governor Paul Tucker recently warned that the cost of living could be stuck above 3 per cent well into the second half of this year – keeping up the pressure on strained household budgets – while the MPC dove Adam Posen also switched his vote away from more QE in April.
But set against inflation worries, official figures have condemned the UK to a double-dip. Despite doubts at the Bank over the construction numbers – the Office for National Statistics also reported a slowdown in the biggest sector of the economy as services firms managed only an anaemic 0.1 per cent advance in the first quarter – the MPC believes underlying growth is strong and is putting more faith in business surveys.
George Buckley, the chief UK economist at Deutsche Bank, said: "It is a tricky decision. But there is a big question over what the ONS are telling us about underlying activity ... growth may be revised higher. The evidence is mixed, although inflation has surprised on the upside and the dialogue from the MPC has been more hawkish lately. The GDP growth figures are volatile – we may not get a positive number until October – but the PMIs are still consistent with underlying growth."
Philip Shaw, Investec's chief economist – in the minority predicting more QE – said the ONS numbers were indicative of a "widespread malaise". He added: "Claiming that figures for one sector are wrong is one thing. Scrambling around to find reasons to explain weakness across the board is quite another and should at the very least raise a few questions."