Bank likely to signal more rate cuts

By Christina Fincher

LONDON (Reuters) - The Bank of England is likely to signal on Wednesday that the economy has entered such a painful recession that there is a greater danger of too little inflation than too much.

Since the central bank's last forecasting round in August, the economy has taken a decided turn for the worse. Unemployment has shot up, house prices have tumbled and the financial crisis has escalated, forcing the government to take unprecedented action to keep major banks afloat.

The Bank shocked markets last week by slashing interest rates by 150 basis points to 3 percent, their lowest level since the 1950s. It justified the cut by saying the severity of the downturn meant there was now a clear risk inflation could fall below its 2 percent target.

Wednesday's Inflation Report will give the Bank the opportunity to explain its reasoning more fully.

If its projections show inflation below target on a two-year horizon if rates are held steady at 3 percent, it will send a strong signal that last week's rate cut will not be the last.

"I think they'll endorse market expectations of further rate cuts to come," said Amit Kara, economist at UBS.

"Inflation is a worry because it might undershoot, not overshoot its target."

HOW LOW WILL THEY GO?