Markets see 60 percent chance of rate cut

By Fiona Shaikh

LONDON (Reuters) - Investors have ramped up their expectations the Bank of England will cut interest rates on Thursday to a near 2-in-3 chance on growing fears British consumers will lead a sharp economic slowdown.

That is double the 1-in-3 possibility priced in at the end of last week and comes amid concerns the U.S. will slide into recession, dragging on growth in Britain and the euro zone too.

And news from retailer Marks and Spencer on Wednesday of an unexpected drop in sales in the run-up to Christmas followed gloomy reports from other stores and cemented the view that consumers, long the driver of economic growth, have finally caved in to higher borrowing and living costs.

Analysts calculate the SONIA swaps curve is pricing in a 60 percent probability of a move on Thursday. Meanwhile, the FTSE-100 share index traded more than 1 percent down and the pound hit a six-month low against the dollar and fell to an all-time low against the euro on worries about the economic outlook.

"There are very obvious downside risks to the MPC's decision tomorrow," said Philip Shaw, economist at Investec.

"What's changed over the past 24 hours is that U.S. equity markets have gone into a tailspin ... and if a company like M&S is reporting problems that must be a symptom that it's pervasive across the sector."

Most economists, like Shaw, are still holding fast to their calls the Monetary Policy Committee will leave borrowing costs at 5.5 percent at the end of their two-day meeting on Thursday, but acknowledge the significant possibility policymakers will cut.

REASONS TO HOLD FIRE