Bank cuts rates to 5 percent

By Matt Falloon and Christina Fincher

LONDON (Reuters) - The Bank of England cut interest rates for the third time in five months on Thursday to cushion the economy from the global credit squeeze, despite persistent worries about rising inflation.

The central bank said the quarter-percentage point reduction in its main rate to 5.0 percent was justified even though inflation was likely to spike this year.

"Credit conditions have tightened and the availability of credit appears to be worsening," the BoE said in a statement.

"The disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below target."

Financial markets priced in a greater chance of more rate cuts as those words compounded existing fears over the economy.

The possibility of lower interest rates is likely to come as a relief to Prime Minister Gordon Brown who is falling increasingly out of favour with voters as his reputation for economic competence loses its shine.

Brown, who has to call an election by May 2010, risked the ire of the staunchly-independent BoE this week by saying low inflation meant Britain could cut interest rates, even though inflation is well above the government's 2 percent target.

The Bank made clear in its rate statement that policymakers remain worried about higher prices becoming entrenched in the public mindset, but said weaker growth abroad should keep inflation in check over the medium term.