By Sumeet Desai
LONDON, Jan 8 (Reuters) - The Bank of England looks set to chop interest rates by at least half a percentage point on Thursday to an all-time low as it continues its battle to keep the British economy from falling into a deep and lasting downturn.
With economic recession a foregone conclusion, financial markets are almost evenly split between pricing in a rate cut of either 50 or 75 basis points from the current 2 percent. Several analysts are expecting a reduction of a full percentage point.
Any cut, the fourth in as many months, would take interest rates to their lowest level ever -- even in the Great Depression of the 1930s, rates only got as low as 2 percent.
And the cuts won't end there. Another big reduction that could take interest rates below 1 percent looks a sure bet in February alongside a signal that borrowing costs will stay low for long time to come.
"For most of its life, the Monetary Policy Committee has set interest rates as a trade-off between growth on the one hand and inflation on the other. Now, however, both are pointing in the same direction as the recession deepens and inflation collapses," said Andrew Smith, chief economist at KPMG.
"Against this background, there is no reason not to keep cutting interest rates."
The data has certainly been bleak. House prices have fallen 20 percent from their peak. Car sales have dived and many retailers are being forced out of business. More than 75,000 people signed up for unemployment benefit in November alone.
FLATFOOTED
Caught on the hop by the severity of the downturn, the BoE has already cut interest rates by 3 percentage points since October.
Before that, a number of MPC members were even thinking about raising interest rates in order to bring down inflation, which is still running well above the BoE's 2 percent target.
Worries about price pressures, however, have fallen by the wayside as evidence the economy is facing a serious recession is overwhelming and policymakers have become more worried about inflation falling below target or turning negative.
Finance minister Alistair Darling signalled in a newspaper interview on Wednesday that he no longer expects a swift economic recovery in the second half of the year. Further tax cuts or government spending look likely in the March budget
That still may not be enough to get the economy moving again as long as banks run scared of making any new lending. BoE policymakers have even been thinking of ways of boosting the economy through more unconventional means once interest rates cannot go any lower.
Quantitative easing, or literally boosting the money supply, is probably a way off yet but central banks all around the world are perhaps for the first time having to think about the same kind of steps the Bank of Japan took earlier this decade.
"We are sceptical that QE in the strict sense, i.e. flooding the banking system with reserves, will give the real economy a significant push, especially as this did not appear to have a material effect in Japan," said Philip Shaw, chief economist at Investec.