Bank of England Weighs Rate-Cut Dilemma

The Bank of England is still expected to hold interest rates at 5.75 percent on Thursday, but analysts say it is a close call, as expectations shifted towards the possibility of monetary easing following weak economic data.

House prices fell for the third month in a row in November, data from largest mortgage lender Halifax showed, signaling the once hot British property market is cooling off fast.

A survey by Nationwide also showed that in November consumer confidence in the UK fell to its lowest level since February, while the British services sector slowed to its weakest in four years in November.

Pressure has been mounting on the Monetary Policy Committee to ease rates, but persistent price inflation is expected to keep many of the committee members from calling for a cut this time, although the conclusion is not as easy to predict as it was last month.

"We think it will be a very close decision, but it's marginally more likely they'll remain on hold," Paul Dales, economist at Capital Economics, told

"Even though the conditions in the credit market have worsened, some members are still reasonably concerned about the inflation outlook," Dales added.

Inevitable Easing

Of 38 economists polled by Thomson Financial, 14 expect the central bank to reduce interest rates by a quarter point, to 5.50 percent.

Many economists see the Bank of England's current wait-and-see policy as only putting off an inevitable easing in the near term, as signs of Britain's slowing economy build.

"It's only a matter of time before interest rates do fall. Especially if the turmoil in the financial markets continues or intensifies, we'll probably get the first cut at the turn of the year," Dales said.

Minutes from November's meeting revealed two of the nine MPC members voted for a rate cut, compared to only one the previous month, suggesting a gradual shift in sentiment towards rate easing.

Another pressure on the Bank to ease rates is the current high level of the London interbank lending rates.

The one-month Libor rate spiked to nine-month highs this week, while the three-month rate hit its highest level since the credit crisis begun in September.

The increases effectively hike the cost of borrowing at a time when rates are already considered too high.

"If (the high rate of interbank lending) continues, it could prompt committee members to act rather quickly," Dales said, adding it "could be a tipping point for some members."