Bank of England seen holding rates

The Bank of England is expected to keep interest rates at 5 percent this week for the fourth month running in what may be policymakers' toughest decision yet.

LONDON (Reuters) - The Bank of England is expected to keep interest rates at 5 percent this week for the fourth month running in what may be policymakers' toughest decision yet.

All 76 analysts polled by Reuters last week said the central bank's Monetary Policy Committee would stand pat another month as it wrestles with both soaring inflation and slumping growth.

But MPC members are finding it hard to make up their minds. The minutes of their meeting last month described the decision then as a "difficult" one.

The stakes have only got higher. Inflation is running far above the 2 percent target. July's data -- the Bank will have an early taste of it -- could show the CPI rate exceeding 4 percent.

The economic news, however, has been unrelentingly gloomy and many say Britain could soon slip into its first recession since the early 1990s when hundreds of thousands lost their jobs and homes.

"The risks of a sharp downturn should dissuade the MPC from raising rates, although we doubt that a cut will be forthcoming until next year," said Philip Shaw, chief economist at Investec.

One MPC member, Tim Besley, wanted to raise rates last month. He is concerned that with inflation possibly poised to touch or exceed 5 percent, the central bank needs to send out a strong signal to maintain credibility.

Just as dovish as Besley is hawkish, David Blanchflower wanted to cut rates last month as his reading of the data tells him the economy is heading into a deep and painful recession.

The U.S. academic, who has consistently called for lower interest rates, appeared to have had little backing last month, according to the meeting minutes.

But the MPC will be armed this month with a new set of forecasts as the central bank prepares its quarterly Inflation Report.

Much will depend on what those show for inflation in two years' time as policy changes now can have little impact on the short-term path of inflation, which looks certain to be higher than it appeared in May.

Growth, meanwhile, could be marked a bit lower. The uncertainty around the forecasts is sure to have become a lot bigger though.

Oil prices have come shooting down in recent weeks just as quickly as they went up. Few would predict their trajectory with any real confidence.

"With a new economic growth forecast due this month, it is a close call," said Andrew Smith, economist at KPMG.

"Overall, it looks like another stand-off: near recession in the real economy dictates against higher rates, but accelerating inflation rules out lower rates, at least for now."