BoE to slash rates again in Dec

LONDON (Reuters) - The Bank of England is not yet finished with its hatchet job on interest rates as it focuses attention on steering the economy out of recession and away from reducing high inflation, a Reuters poll found.

The Monetary Policy Committee surprised everyone on Thursday when it cut rates by a whopping 150 basis points to 3.0 percent but economists are still expecting the central bank to slash rates further when it meets in December.

"The MPC stunned markets today. Today's decision was clearly influenced by an increasing swathe of soul destroying economic news. Our initial thinking is that a further 50 basis point cut will follow next month," said Philip Shaw at Investec.

Median forecasts from the poll of 50 economists, taken after the bank's shock move, saw rates falling to 2.5 percent in December and then dropping to 2.0 percent by March where they would remain through to mid-2010.

Twenty-seven of 50 economists forecast a half-point in December, which financial markets are also pricing in.

"We see the need for continued easing over the coming months, and have consequently revised down our view of the trough in rates to 1.5 percent. An extraordinary interest rate level for truly extraordinary circumstances," said George Buckley at Deutsche Bank.

A drop to 1.5 percent would be the lowest rate announced by the bank since it was founded in 1694.

Median forecasts in a poll taken earlier this week had seen rates at 3.5 percent at the end of this year, 3.0 percent by end-March, and then falling to 2.5 percent by June where they would remain through to the middle of 2010.

Economists in the poll before the announcement had predicted a 50 basis point cut and although some banks had forecast a 100 point cut, none had foreseen the huge 150 basis point reduction the MPC delivered on Thursday.

Data released last month showed the economy shrank 0.5 percent in the third quarter, the first decline in 16 years, after stagnating in the second quarter. Recent data suggests the UK is now in recession, usually defined as two consecutive quarters of contraction.

The country has been battered by a slew of negative news of late with its dominant service sector shrinking at a record pace, consumer spending slowing at an alarming rate while house prices, a bedrock of consumer wealth, have plummeted.

The BoE slashed 50 basis points from rates on Oct 8 as part of an unprecedented global coordinated easing but had not cut more than half a point since it gained policy independence in 1997.

Other central banks have been following the lead of the United States Federal Reserve, which began aggressively cutting rates more than a year ago, with the European Central Bank and the Reserve Bank of Australia taking an axe to rates.

But the Bank of England had been hampered by high inflation -- it reached 5.2 percent in September, considerably more than double its two percent target -- but this is seen dropping as the economic slowdown and plummeting oil prices take effect.

(Polling by Bangalore Polling Unit)