Bank set to cut rates to record low

By Sumeet Desai

LONDON (Reuters) - The Bank of England looks set to cut interest rates by at least half a percentage point this week to their lowest level on record as it tries to prevent the economy sliding into a long and painful recession.

Financial markets have fully priced in a cut of at least 50 basis points to 1.5 percent when the central bank's Monetary Policy Committee ends its two-day meeting on Thursday. Several analysts are even predicting another 100 basis point reduction.

And the cuts won't end there. Another big reduction that could take interest rates below 1 percent looks a sure bet in February alongside a signal that borrowing costs will stay low for long time to come.

"We have pencilled in the Bank rate bottoming out at 0.75 percent, but we stand ready to change this if the Bank of England hints that rates could fall further," said Philip Shaw, chief economist at Investec.

Caught on the hop by the severity of the downturn, the Bank has already cut interest rates by 3 percentage points since October.

Before that, a number of policymakers were even thinking about raising interest rates in order to bring down inflation, which is still running well above the Bank's 2 percent target.

DEFLATION?

Worries about price pressures, however, have fallen by the wayside as evidence the economy is facing a serious recession is overwhelming and policymakers have become more worried about inflation falling below target or turning negative.