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Bank of England set to hold rates steady at 5 pct

Thu, Sep 4 2008, 05:16 GMT
http://www.afxnews.com

LONDON, Sept 4 (Reuters) - The Bank of England looks set to keep interest rates at 5 percent for a fifth month running on Thursday but expectations are rising that a stuttering economy will force it to cut rates before the end of the year.

With inflation more than double the central bank's 2 percent target, all 67 analysts polled by Reuters expect the Monetary Policy Committee to leave interest rates unchanged at 1100 GMT.

Given the speed and scale of the economic slowdown, however, most are convinced a rate cut is just a matter of time.

"For the time being the stand-off on the Monetary Policy Committee is set to continue, but the prospect of an even weaker economy and falling inflation should open the way for lower interest rates later in the year," said Andrew Smith, chief economist at KPMG.

Britain's economy failed to grow in the second quarter of this year for the first time since the early 1990s and many analysts believe the country has already tipped into recession.

House prices have fallen more than 10 percent in less than a year and few believe a package of measures unveiled by the government this week will be enough to stop the rot.

With unemployment rising and real incomes falling, consumer confidence is at rock bottom and retailers are feeling the pinch.

CONFLICTING VIEWS

The nine-member policy committee was split three ways last month. Tim Besley wanted to hike rates to make sure high inflation did not spread through the economy.

David Blanchflower wanted to cut rates to ease the economic pain and has since signalled that he might even vote for a half-point cut in borrowing costs this month.

The remaining seven, including Bank Governor Mervyn King, thought no change was the best option given the competing risks. A similar analysis is expected this week.

Some economists believe a rate cut could come as early as November as inflation may have peaked by then, particularly if oil prices continue to fall. Crude oil prices hit a five-month low below $106 a barrel this week, having fallen more than $40 from July's all-time peak.

However, the more hawkish members on the monetary policy committee may still be concerned that the high inflation will feed into high wage demands and may want to wait for the January pay round.

By making imports more expensive, sterling's sharp fall on the foreign exchanges has also added to inflation risks. The pound has suffered its worst month against the dollar since its ejection from Europe's Exchange Rate Mechanism in 1992 and shows no sign of recovering.

Lastly, there is the risk of tax cuts and spending increases in the government's autumn pre-Budget Report. If the government wants to deliver a fiscal stimulus, the Bank may be more reluctant to deliver a monetary one.

"The risk that inflation expectations become permanently dislodged will make the central bank cautious," said Nick Kounis, an economist at Fortis. "We think the Bank of England will eventually cut interest rates but probably not until next year."

(Reporting by Christina Fincher; Editing by Andy Bruce) Keywords: BRITAIN BANK/

tf.TFN-Europe_newsdesk@thomson.com

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