Bank is expected to leave rates on hold

By Sumeet Desai

LONDON (Reuters) - Growth is falling, inflation is rising and interest rates, as a result, look set to remain steady this week and possibly for the rest of the year as policymakers grapple with the most challenging conditions in around two decades.

All 72 analysts polled by Reuters predicted the Bank of England's Monetary Policy Committee would keep rates pegged at 5 percent after its two-day meeting on Thursday.

King's predecessor, Eddie George, used to liken the MPC's travails to finding a safe route between Scylla and Charybdis, the two sea monsters of Homeric legend that threatened the lives of Odysseus and his men.

Policymakers say it's never been this hard. On one hand, the economy risks hitting the rocks as a housing market downturn deepens. But on the other, the soaring cost of food and fuel is threatening to create an inflationary spiral.

"Rates are on hold until it is clearer which is the greater threat to achieving the inflation target," said Andrew Smith, chief economist at KPMG. "It may be some time before the MPC feels confident enough to bet one way or the other."

A few MPC members thought about raising rates last month -- inflation is running at more than a percentage point above the central bank's target and could soon double it -- before concluding the economy didn't need it.

One policymaker, David Blanchflower, voted to cut borrowing costs by a quarter-point. He has argued that the risks to growth are so great that worrying about inflation is like fiddling when Rome burns.

The European Central Bank doesn't think so, though. It lifted borrowing costs in the euro zone last week to rein in soaring prices and financial markets are betting the BoE will soon follow suit.