By Sumeet Desai
LONDON, March 2 (Reuters) - The Bank of England is widely expected to cut interest rates by half a percentage point this week, but there is still a big risk that it may keep borrowing costs at 1.0 percent or cut by a smaller amount.
Fifty-four of the 62 analysts polled by Reuters last week predicted its Monetary Policy Committee would cut rates for the sixth month running when it ends a two-day meeting on Thursday.
Most say a half point reduction to a new record low of 0.5 percent is a done deal. But BoE policymakers have been worried that cutting rates beyond 1 percent could perversely harm the economy because of what it might do to banks' profits.
That was a key argument for cutting rates by just half a point last month, according to minutes of the MPC's February meeting, when all nine members agreed on the need to seek the Treasury's permission to go ahead with quantitative easing (QE).
QE, or boosting the money supply, is regarded by policymakers as the logical next step when rates cannot fall any lower and the economy still needs further support.
Finance minister Alistair Darling is likely to approve this in the next few days and the BoE is expected to start buying government or corporate bonds with newly-created money this week.
According to John Gieve, who was a deputy BoE governor until the end of last month, the issue was whether rates should stay at 1 percent or come down to 0.5 percent.
"The argument against a sub-1 percent Bank Rate is as sound this week as it was a month ago. If the Committee is to follow this logic, it will vote against any further rate reduction," said Stephen Lewis, chief economist at Monument Securities.
The BoE was worried that deposit rates are already almost at zero so cuts to official BoE rates, which banks may have to pass on to borrowers, would squeeze their profit margins. This might make them lend less, not more.
BoE policymakers concluded that there was much uncertainty about what cutting rates beyond 1 percent would do.
The Treasury would also probably be content if rates did not fall much further because of a political storm over what low rates are doing to people such as pensioners who rely on income from their savings.
Darling said last month that rate cuts start having less effect past a certain point.
MPC member David Blanchflower, however, argued for a cut to 0.5 percent last month. The economy needed more stimulus and a rate cut would still have some impact, even if it were less than before, he said. Rates, he has argued, could come down to around 0.25 percent.
The MPC may also feel it has to lower rates if market expectations strongly favour a half point cut. Otherwise, it may have to fend off questions on why inflation is expected to undershoot its target so much.
"Even if Committee members harbour anxieties that another rate cut might do more harm than good, they may feel that they have to make a gesture on interest rates to show the media they empathise with the nation's pain," said Lewis.