Bank of England expected to hold rates steady

By Sumeet Desai

LONDON (Reuters) - The Bank of England is expected to keep interest rates at 5 percent on Thursday 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 hold rates steady this month as it wrestles with both soaring inflation and slumping growth. No change is expected for a while.

"Current elevated inflation levels and risks mean that the Bank of England seems unlikely to cut interest rates again any time soon," said Howard Archer, economist at Global Insight.

"There remains a serious possibility that it could even raise them. This will do little for consumer confidence and spending intentions."

The data has already been unrelentingly bleak and many are warning the economy could soon tip into the first recession since the early 1990s when hundreds of thousands lost their jobs and homes.

But inflation is running well above the 2 percent target and July's data due next week -- the Bank will have an early taste of it -- could show the CPI rate exceeding 4 percent.

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 tumbled in recent weeks just as quickly as they went up. Few would predict their trajectory with any real confidence.