Bank of England set to hold rates for now :

March 5th,2008

LONDON (Reuters) - The Bank (TBHS - news) of England looks set to keep interest rates at 5.25 percent this week before cutting them for a third time since December by the middle of the year to shore up an economy buffeted by the global credit crunch.
All but one of 65 economists polled last week expected the central bank's Monetary Policy Committee to hold rates after last month's quarter-point cut, because of concerns over rising inflationary pressures.

Policymakers have been out in force over the last month, saying they had to balance concerns about slowing growth against the danger that a short-term spike in inflation could lead to public expectations of higher prices becoming entrenched.

"We expect the Bank of England to trim interest rates by a further 25 basis points to 5 percent in May," said Howard Archer, chief UK economist at Global Insight.

"But it could move in April if the economy appears to be slowing sharply, wage growth remains contained and inflation expectations appear to be at least stabilising."

Despite economists forecasts, markets -- currently pricing in three cuts by the end of the year -- will remain wary of about the BoE going for a reduction this week.

The MPC has been ready to surprise before and policymakers may argue why wait if rates are going to come down anyway.

DILEMMA
The BoE's February Inflation Report showed that interest rates would have to fall one or two times to make sure inflation was on target in 2 years.

Arch-dove David Blanchflower wanted to cut interest rates by 50 basis points last month when his colleagues thought 25 basis points would suffice. He argued that a bigger cut early would preclude the need for more aggressive moves later.

Even normally hawkish MPC members have expressed concern that rates may need to be lower than otherwise because of tightening credit conditions.

Banks are making it harder for people to get mortgages as they themselves face higher financing costs.

"Corporates are suffering too. Not only have banks tightened their lending conditions for companies, but the cost of raising funds in the capital markets has begun to rise too," said Jonathan Loynes, chief UK economist at Capital Economics.
But inflation remains a problem and is complicating the equation for the BoE which is charged with keeping inflation at 2 percent.
Rising food and energy prices are likely to push inflation up sharply this year and policymakers are worrying that this could become self-perpetuating as people start expecting prices to go higher and demand higher wages as a result.

News Source: http://uk.biz.yahoo.com