Bank will make quarter-point cut in interest rates, say economists

City economists overwhelmingly expect the Bank of England's Monetary Policy Committee to cut interest rates by 0.25 percentage points at the culmination of its meeting on Wednesday and Thursday.

A survey of 60 economists published over the weekend revealed the unanimous prediction that rates will be trimmed from 5.50 to 5.25 per cent. The poll itself may even become a factor in the MPC's thinking, as the committee has shown a marked reluctance to startle the markets during its decade-long existence.

MPC members have also demonstrated a preference for smaller, incremental alterations to rates – in marked contrast to the US Federal Reserve's recent aggressive policy.

"A quarter-point rate cut on Thursday looks pretty much a done deal in the face of tightening credit conditions," said Andrew Smith, chief economist at KPMG. "Further rate cuts are on the cards – but not until more concrete evidence of a slowdown emerges."

The MPC, which will announce its decision at noon on Thursday, faces what the Governor of the Bank, Mervyn King, called a "delicate balancing act". Mr King warned that inflationary pressures from higher energy and food prices, a steep depreciation in sterling's value and higher inflationary expectations have to be balanced against some weak readings on economic activity, turbulence in capital markets and evidence that the UK's flexible labour market remains in check.

Having cut rates by 0.25 percentage points in Dec-ember, at last month's MPC meeting members voted eight to one to keep rates on hold, with only the "arch dove" David Blanchflower pressing for a cut.

However, this week's decision looks clear-cut amid worsening economic data and remarks by Mr King last week to the effect that the current level of interest rates was bearing down on demand. Other "hawks" on the committee are expected to fall into line.

Still, many analysts remain worried that inflation will peak at or above 3 per cent in the third quarter of this year, which would require the Governor to write another letter of explanation to the Chancellor of the Exchequer. Mr King had to write such a missive to Gordon Brown last April.

Both the Governor and his deputy, Sir John Gieve, have hinted that inflation may well reach such a pitch before subsiding towards the end of the year.

The statement accompanying the rate cut will be keenly scrutinised. Karen Ward, UK economist at HSBC, said: "The currently elevated level of inflation expectations suggests the Bank's credibility in sticking to its inflation mandate is under threat. A relatively hawkish, inflation-focused statement would reassert their commitment to price stability rather than simply to support near-term GDP growth."

Meanwhile, the CBI's regional trends survey, released today, will warn that manufacturers' confidence has faltered in recent weeks. The CBI will also say that many manufacturers have nonetheless been able to raise prices, underlining the dilemma faced by the MPC.

An Ernst & Young survey will reveal that company profits warnings are at an eight-year high.