Interest rates set to be cut

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City experts said it was likely the Bank of England will cut interest rates by quarter of a percentage point to 5% at its monthly meeting on Thursday, despite the impact that such a move could have on inflation.

It will be the Bank's third rate cut since December, although homeowners have struggled to benefit so far after tighter credit conditions caused nervous lenders to withdraw products and increase rates on many ranges.

Members of the Bank of England's monetary policy committee (MPC) will be concerned the current uncertain conditions could feed through into sharply lower growth in the UK economy.

Howard Archer, chief economist at Global Insight, said he expected rates to finish the year at 4.25%.

"We believe that the increased downside risks to growth stemming from tighter credit conditions, coupled with signs that the economic downturn could be deepening, will lead the MPC to cut interest rates from 5.25% to 5% on Thursday, despite the inflation pressures."

The Bank is charged with keeping inflation at around 2%, but the official measure, the Consumer Prices Index, is currently above target at 2.5%.

The committee's inflation-controlling mandate means it has to be more cautious than policymakers in the US, where rates have fallen sharply this year.

Economists were until recently predicting that the MPC will hold off until May before easing rates further.

Philip Shaw, chief economist at Investec Securities, said: "We consider that a June easing to 4.75% is likely to follow this week's reduction and after that, the critical determinant will be whether there are signs of normalisation in credit markets."