Markets jittery as Bank of England set to hold rates

BoE deputy governor John Gieve said last week that he had even considered voting for a rise last month but fellow MPC member David Blanchflower appeared more concerned the economy was slowing down.

Recent data suggests he may have a point.

Service sector output, which makes up three-quarters of the national total, fell 0.3 percent in July, the sharpest decline in nearly three years. British Q2 GDP growth, meanwhile, was revised down to roughly its trend rate.

The statistics office had also massively overstated the extent of price pressures in the economy and a big fall in gas prices bodes well for inflation coming down if utility companies pass on their savings as quickly as they passed on higher costs.

But some influential academics have been sounding the alarm over the amount of cash sloshing around the economy. M4 money supply growth rose to 13.7 percent in August, its fastest rate since 1990.

"High monetary growth is invariably associated, in the medium and longer terms, with inflation," the academics said in a letter to a newspaper last week. Signatories included former MPC member Charles Goodhart.

And while the latest fall in energy prices may depress inflation further ahead, the CPI is currently running half a point above its 2.0 percent target and set to rise more on higher university tuition fees and pre-announced utility bill hikes.

BoE Governor Mervyn King said in August there was a 50-50 chance it could exceed three percent in the coming months - a level that would force him to write an explanatory letter to Chancellor of the Exchequer Gordon Brown.

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