Pound edges up against dollar

LONDON (Reuters) - Sterling edged up against the dollar on Thursday as investors expected the Bank of England would deliver a big interest rate cut later in the day to help boost the ailing economy.

The Bank is widely seen slashing its benchmark rate by half a percentage point or more from 4.5 percent to try to shield the economy from the fallout of the credit crisis. Its decision is due at 12 p.m.. Economic weakness, highlighted by a record 14.9 percent year-on-year fall in the October Halifax House Price Index [nL6214102], has heightened speculation that the Bank may deliver an even bigger rate cut, with some saying a one percentage point rate cut should not be ruled out. "A 50 basis point cut is the likely move ... but there's lots of risk regarding the possible size of the cut, so moves in sterling could be very volatile today," said David Page, economist at Investec.

Sterling fell roughly 0.7 percent to hit a session low of $1.5782 early on Thursday, according to Reuters data but had recovered by 9:18 a.m. to trade 0.2 percent higher at $1.5946.

Amid growing signs that the economy is in a recession, Sonia interest rate futures suggest a roughly 80 percent chance that the Bank will cut rates a full percentage point on Thursday, while indicating rates will be at 3.25 percent by year-end.

"The BoE has plenty of room to move and with the effects of the credit crunch, the effectiveness of rate cuts may be more limited than in previous cycles," ING analysts said in a research note.

While some traders say a one percentage point rate cut could boost sterling as it would show the Bank is taking decisive action to help the economy, others are more inclined to believe such a big move would hurt the pound.

Those in the second camp say a rate cut of this size could stoke concern about the economic outlook while decreasing the pound's yield advantage against other currencies.

The Bank surprised markets by cutting rates by half a percentage point last month in a move that was coordinated with other major central banks to prop up the global economy during a period of intense financial market turmoil.

The European Central Bank is also expected to cut rates on Thursday, with financial markets looking for it to reduce its key rate by half a percentage point from 3.75 percent.