By Jonathan Cable
LONDON, Dec 4 (Reuters) - The Bank of England has not yet finished butchering interest rates and will cut them again in January as evidence piles up that the British economy is sinking into a deep recession, a Reuters poll showed.
The central bank slashed 100 basis points from rates on Thursday to put them at 2.0 percent, their lowest since 1951, just a month after it stunned markets with a 150 basis point cut. A Reuters poll of 58 economists, taken after the bank's announcement, showed Bank Rate falling to 1.0 percent by March where it would stay until 2010 before rising again.
Any cut below two percent would set rates at a level never seen since the Bank of England was created in 1694, and markets are pricing in rates falling to a trough of one percent by June.
Forty of 50 economists in Thursday's snap poll saw the bank's next move coming in January, with the 35 of them forecasting a more modest 50 basis point cut to 1.5 percent.
"The balance of risks to rates remain to the downside ... Any future easing will likely be done in more modest 50 basis point steps, as the 'ammunition' of conventional policy begins to run out," said Daragh Maher at Calyon.
A poll taken earlier this week showed rates at 1.5 percent by March and then dropping again to 1.25 percent by the end of the third quarter. Until recently, the BoE had been prevented from cutting rates as inflation was running at more than double its two percent target. But that has all changed. Many people are now worried that inflation may undershoot the target and some are even concerned about the threat of deflation. Economists see deflation -- a generalised sustained fall in prices -- as a nightmare scenario where economies slump into malaise as consumers and firms hold back on spending on the view that goods will become cheaper the longer they wait.
Thursday's move came before a 75 basis point cut by the European Central Bank and after a shock 175 point cut by Sweden's Riksbank as economies continue to suffer from a global slowdown.
A rapid deterioration in business conditions over the last month has raised fears that Britain could be heading into a much deeper recession than previously expected.
Data released last month confirmed the British economy shrank 0.5 percent in the third quarter, the first decline in 16 years, after stagnating in the second quarter. Recent data suggest the UK is now in recession, usually defined as two consecutive quarters of contraction.
Figures earlier this week about the UK's manufacturing and dominant service sectors suggested the economy may have contracted more sharply in the final few months of this year than in the third quarter.
Amid a global credit crunch banks have clamped down on lending, hitting Britain's highly-indebted economy hard. House prices, a bedrock of consumer wealth, have fallen 18 percent from last year's peak, unemployment is soaring and consumer confidence is plummeting.
Chancellor Alistair Darling unveiled last-ditch plans in his pre-budget report last month, including tax cuts and the bringing forward of capital spending, in an effort to stave off a deep recession.
Both the government and the central bank have taken drastic action to pump cash into the economy in recent months but businesses and consumers are still finding it hard to borrow, but this may not be enough.
"The conclusion from the BoE's justification for this month's one percent cut is that further measures are necessary to restore monetary liquidity," said Lena Komileva at Tullett Prebon.
(Polling by Bangalore Polling Unit; editing by David Stamp)