Slower economy likely to keep rates on hold

City economists have formed the virtually unanimous view that the Bank of England will keep rates on hold when its Monetary Policy Committee meets this Thursday. A recent poll by Reuters indicated that 92 per cent of analysts expect rates to stay at 5.75 per cent.

The situation is in marked contrast to a few months ago. By now, the City consensus ran, rates should have been at 6 per cent plus. That, however, was "BC" - before the credit crunch. Since then, the intensification of the US sub-prime crisis, the run on Northern Rock and a slew of economic data suggesting that the economy is slowing down of its own accord have transformed the outlook.

Indeed, to some extent the tightening of conditions in parts of the credit markets have amounted to a de facto interest-rate rise, as financial institutions have "repriced risk", in the bankers' jargon, requiring higher returns for their more exotic adventures and attempting to "hoard liquidity" on their balance sheets in case some nasty surprises turn up.

Members of the MPC have been unusually forthright over the past few days. Recent comments from Kate Barker, David Blanchflower (both external members) and Charles Bean (the Bank's chief economist), have further shortened the odds that interest rates will be left on hold.

Vicky Redwood of Capital Economics said: "While the MPC's bias has clearly shifted in favour of looser policy, we do not think the committee is in any rush to cut." George Johns of Barclays Capital echoed that view: "When confronted with uncertainty, central banks have a strong tendency to be cautious. We therefore think that amid such uncertainty the MPC will wait for clearer signs of a macroeconomic slowdown before agreeing to a rate cut, consistent with our expectation it will lower Bank rate next February."

In a rather tighter bind is the European Central Bank. It, too, will set its benchmark on Thursday, but with a much sharper divergence between balancing the risks to growth and financial stability on one side and inflation on the other.

Whereas the Bank has seen UK inflation return to below target, in the eurozone it has jumped from 2.1 per cent to 2.6 per cent in October, the highest rate since September 2005. Still, the odds are now that the ECB, the Bank of England, and, after last week's cut, the US Fed will all keep rates more or less steady for some months.