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Those interested in buying investment property may place high hopes on an interest rate cut. Many economists have predicted one next month, but the scope of cuts may, it appears, be limited by the threat inflation poses.

Such a warning was provided last night by the Bank of England governor Mervyn King. Speaking to a business audience in Bristol, he warned that consumer prices index inflation may be high enough for him to have to write at least one open letter to the chancellor explaining how the monetary policy committee (MPC) is going to resolve the situation. 

The one time this has happened since the MPC was established in 1997 was in last March, when the MPC responded by raining the base rate. Such an event now could be very harmful for the economy in its current state and possibly more so for the property market.

As a result, the MPC may opt to exercise plenty of caution when deciding interest rate policy. This certainly appears to have been the case this month, when David Blanchflower was the only member of nine to vote for a rate cut. Stating that "the short-term inflation outlook had worsened markedly", the minutes pointed to the potential threat of rising food, oil and domestic fuel prices. They also suggested two successive rate cuts would send the wring signal out about the Bank's priorities, with the implication that preserving growth had become more important than curbing rising prices.

This view will conflict with that of some. Sir Terry Leahy, chief executive of Tesco, called for several rate cuts in an interview with Sky News yesterday. His view was that the rising prices in some areas would be counteracted by sluggish retail sales and he believed the bank should "get on with" the job of making cuts in the base rate.

Overall, the current inflation situation is not expected to lead to a hold decision next month. Investec securities chief economist Philip Shaw said he still expected such a cut to take place. But "aggressive" cutting was out.

Such aggression was considered by the MPC in December when it last lowered the base rate. Yesterday it became real policy across the Atlantic when the Federal Reserve announced a 0.75 per cent reduction in a bid to boost the flagging US economy. But, it appears, the inflation situation in Britain is such the MPC is minded to proceed with much more caution.