Difficult decisions for Bank of England

Should inflation remain high, the Bank of England could face a turbulent 2008, the Confederation of British Industry (CBI) has warned.

Lai Wha Co, principal economist for the CBI, predicts that inflation above predicted levels could force the Banks monetary policy committee to maintain a relatively high base rate.

In light of the possibility that the UK economy could be beginning to slow, she points out that businesses may prefer to see rates reduced.

"The Bank has to make a difficult decision about interest rates," Ms Co comments.

"On the one hand its monitoring how sharply the economy might slow, but on the other hand it has to weigh up the concerns about inflationary risk."

However, Ms Co observes that the two issues typically go hand in hand on a domestic level.

She explains that slowing demand due to a weaker economy naturally brings down inflation, with overseas sales the most likely way in which price growth could be sustained.