The Bank of England could deliver its biggest interest rate cut in 15 years on Thursday as fears grow the Britain could be in for a long and painful recession.
Faced with mounting evidence that the economy is shrinking fast, financial markets have priced in borrowing costs falling by three-quarters of a percentage point when the central bank's rate-setting committee finishes its meeting at 1200 GMT.
Ten out of 62 analysts polled by Reuters this week predicted the BoE would lop a full percentage point off the current 4.5 percent benchmark interest rate. More have joined their ranks since and all said a half-point rate cut was a done deal.
"There is little doubt in anyone's mind about whether or not interest rates will be cut. The real question is just how much" said Hetal Mehta, senior economic adviser to Ernst and Young. "The MPC must cut rates by 100 basis points."
The Monetary Policy Committee has not made such a dramatic reduction in rates since it was set up 11 years ago and the last time borrowing costs fell so fast in one day was in 1993.
But the global financial crisis has already broken a lot of conventions after weeks and months of turmoil which has claimed some of the financial world's biggest institutions and has spread through almost every country in the world.
Last month, the BoE joined forces with the U.S. Federal Reserve and European Central Bank to make an emergency half-point cut in interest rates. The ultra-cautious ECB is even expected to cut another half-point after the BoE verdict.
TOO LITTLE?
In a blunt speech last month, BoE Governor Mervyn King said the British economy was likely entering recession, comments widely interpreted as opening the doors to much lower rates, as Federal Reserve chairman Ben Bernanke did in January.
Until only a few months back, King and some of his committee were worried about inflation, currently running at more than double the BoE's 2 percent target.
But the economy has taken a real turn for the worse, even before September's ructions in the financial markets. Prime Minister Gordon Brown said on Wednesday inflation was coming down and the BoE saw it had scope to cut rates.
House prices are sliding at rates not seen in the last market crash of the early 1990s, manufacturing has posted its longest stretch of decline in nearly 30 year and hundreds of thousands are set to lose their jobs in the next few months.
Britain's biggest clothing retailer Marks and Spencer Group Plc said this week that its profits had slumped by a third as consumer sentiment was taking a battering from the events in markets and their impact on the wider economy.
Business groups are clamouring for big rate cuts and a half-point reduction could lead to calls of the BoE doing too little, too late. MPC member David Blanchflower has already accused his colleagues of being behind the curve.
But the BoE may also want to save its thunder and have a quick succession of rate cuts rather than front-loading all the easing.
Cutting rates very rapidly now might perversely also lift sterling which has fallen sharply in recent weeks. Policymakers expect the weakness in the pound's exchange rate to help boost the economy, even though weak global demand may mean this effect is less pronounced than in the past.
Rate cuts will help less than in the past since lenders, who are suffering from a global credit crunch, are not necessarily passing them on to borrowers. That means rates may need to fall even lower than the half-century low of 3.5 percent seen in mid-2003.
