Financial markets are still betting the next move in interest rates will be up but the Bank of England could be readying itself to cut rates in August in case the economy keeps slowing down.
Most economists polled by Reuters this month say that interest rates will stay on hold for the rest of the year as policymakers grapple with the highest inflation in more than a decade even though economic growth is coming to a standstill.
But when it comes to surprises, the Bank has form. Every now and again, it shocks markets by interest rate moves that almost no one has predicted - most recently its cut in December.
Policymakers are also very worried about the possibility of the economy slowing down so much that inflation is actually below the target in two years time.
"The mistake we could make, and we are all worried about this, is of holding policy too tight, and the economy weakening more than is necessary to get inflation back on target," policymaker Kate Barker said in an interview for Monday's edition of the Times newspaper.
The Bank is charged with keeping inflation at 2 percent but official figures due on Tuesday are expected to show the CPI rate hitting 3.6 percent, the highest level since the Monetary Policy Committee was set up in 1997,
But there is little policymakers can do to bring the current rate of inflation down, Bank Governor Mervyn King said on Monday in the central bank's annual report to parliament.
"The MPC can have little impact on the path of inflation in the short term. It has not attempted to prevent inflation moving away from the target following the sharp rise in commodity prices," the governor said.
"To do so would have required a large increase in interest rates with such a severe impact on output and employment that it would have risked inflation falling well below the target further out.
RECESSION WATCH
