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Bank of England May Pause for Breath

The Bank of England is likely to hold interest rates steady at 5.5 percent when it meets Thursday, analysts told CNBC.com, but it looks set to resume its monetary-easing strategy in February.

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"I think they will pause for breath, based on the fact they are still concerned about upside risks to price inflation," Paul Dales, economist at Capital Economics, told CNBC.com.

The Monetary Policy Committee is also wary of panicking market participants with back-to-back rate cuts, despite clear signs of weakness in the retail and housing sectors, Dales added.

Declining house-price inflation and weak Christmas sales figures from many retailers, as well as from the British Retail Consortium, have left some market watchers half expecting a cut.

"It's a very close call … it's been a tough Christmas (for retailers)," Sarah Hewin, senior economist at American Express Bank, told "Worldwide Exchange," adding that the housing sector is generally trending down.

Economists polled by Reuters last week said the likelihood of a cut from the MPC was 35 percent, with 12 out of 63 expecting a reduction.

Rate Cut More Likely in February

If the Bank of England does hold this time, it is widely expected that it will cut rates the following month, to counteract the possibility of further economic slowdown.

"If we don't see a cut this month, we should certainly see a cut next month," Hewin said, adding that "the Bank of England is more likely to pay attention to the growth risks than to worry too much about inflation."

The effect of the pound weakening versus the euro could exaggerate inflationary pressures, however, because imports will lose the benefit of its recent strength.

This could return inflation concerns to the forefront, but a further slowdown in economic activity would help to ease inflation, Dale said, adding that he expected rates to go as low as 4.5 percent by the end of 2008.

Npower, the fourth-largest energy supplier in the UK, recently announced rises in gas and electricity tariffs, and food prices are also on the rise.

"The service sector data has actually improved, but the most significant argument against a rate cut today comes from inflation," James Knightley, an economist with ING Bank, said in a market note.