By Christina Fincher
LONDON, Aug 3 (Reuters) - The Bank of England looks certain to leave interest rates at a record low of 0.5 percent this week but economists are split on whether it will keep pumping money into the economy, or whether it will call a halt for now.
The central bank has already hit its 125 billion pound ($209 billion) target for quantitative easing and will review the scale of its asset purchases -- the bulk of which have been gilts -- at its meeting on Aug. 5-6.
The BoE launched its QE programme in March with the aim of heading off deflation by raising the amount of money in circulation to get banks lending and consumers spending again. The housing market and credit sentiment have both improved since then and there is a good chance the economy will pull out of recession later this year. On the other hand, second-quarter GDP figures were disappointing and there have been few convincing signs that bank lending is picking up.
Following is a summary of possible scenarios for the BoE's policy decision, which will be announced at 1100 GMT on Thursday.
BOE HOLDS RATES, HALTS QE PURCHASES
This is the central scenario for many in the market as it enables the BoE to assess the impact of its asset purchases so far, with the option of reviving the programme at a later date if needed.
BoE Deputy Governor Charles Bean has stressed it could take nine months for the full impact of QE to be felt, while policymaker Andrew Sentance has indicated that a pause would be "a phase where we're watching and observing what happens in the economy".
This approach makes particular sense if the BoE believes that most of the benefit of QE comes from the total extra stock of money in the economy, which has only just reached its maximum, rather than from a regular inflow.
* Probability: Joint front-runner
* Market impact: Gilt yields could jump by up to 30 basis points, although the impact would be more muted if the wording of the BoE's statement suggested QE might be resumed at a later date. Share prices might suffer a little while sterling might gain slightly.
BOE HOLDS RATES, RAISES QE TARGET
If BoE policymakers were concerned that an abrupt halt to its gilt purchases might cause an unwanted spike in bond yields, they could raise the QE target to 150 billion pounds -- the limit authorised by the government.
Or they could ask the government to authorise a higher limit for QE purchases, giving them more firepower to use if the recovery derails.
A decision to raise the QE target would likely reflect a view that more needs to be done to put the economy on a recovery path, and that keeping borrowing costs low is an integral part of this process.
* Probability: Joint front-runner
* Market impact: Gilt prices could rally, pushing yields lower, although the move would be limited if investors felt the BoE were simply trying to ensure a smooth exit or if the BoE altered its asset buying programme to focus more heavily on corporate debt.
Share prices might firm, but any implication that a weak economic outlook had forced the BoE's hand could dampen gains and weaken sterling.
BOE HOLDS RATES, ISSUES NO STATEMENT ON QE
The BoE might decide to make no mention of QE in the statement that normally accompanies its rate decision, keeping investors guessing until its quarterly Inflation Report on Aug. 12 when it can set out its strategy in greater detail.
* Probability: Low
* Market impact: No mention of QE would suggest that the BoE's gilt-buying days were likely over and yields would rise as a result. Uncertainty over the BoE's strategy might weigh on equities and make investors reluctant to push the pound aggressively higher.
BOE RAISES RATES, STOPS QE
BoE officials have said publicly in recent weeks that it is too early to consider the timing of tighter monetary policy, making higher interest rates this month a near impossibility. No MPC member has voted for higher rates since August last year.
* Probability: Almost nil
* Market impact: Gilt prices would plummet, especially at the short end, and share prices would fall on fears that the economic recovery would derail. (Additional reporting by David Milliken; Editing by Richard Balmforth) ($1 = 0.5972 pounds)