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Last Updated: Thursday, 6 December 2007, 10:46 GMT
Interest rates tipped to be cut
Graph showing the direction of UK interest rates
The Bank of England is set to cut UK interest rates, analysts have forecast, amid signs of a slowing economy.

The decision had been seen as too close to call but now the City is widely expecting the cost of borrowing to fall from its current level of 5.75%.

There have been concerns about the impact a cut would have on inflation.

Recent surveys have suggested economic conditions have worsened in the past few weeks with falling house prices and a slump in consumer confidence.

However, official figures released on Thursday indicated that UK manufacturing enjoyed a better-than-expected performance in October, with output increasing.

Output rose by 0.3% in October after a 0.6% fall in September, the Office for National Statistics said, which was ahead of forecasts and took the annual rate of growth to 0.3%.

Mixed picture

The Bank has raised interest rates five times since the middle of last year, but kept rates on hold since July.

It will announce its decision at midday on Thursday, after a two-day meeting of the Monetary Policy Committee.

Observers say that one of the key factors behind a likely cut is that the Libor - the rate at which banks lend to one another - has risen very sharply, bringing a return of the credit crunch seen during the summer.

The Bank has been keen to keep price growth under control, and many analysts were predicting that they would want to see oil and food cost pressures abate before moving to lower interest rates.

However, surveys this week have shown falling house prices and a slump in consumer confidence, with many observers blaming the Bank's five interest rate increases since the middle of last year.

On Wednesday, Halifax reported that UK house prices dropped 1.1% in November saying that higher borrowing costs and increased mortgage repayment costs were taking their toll.

At the same time, a report from rival lender Nationwide showed that its measure of consumer confidence had seen the biggest monthly decline since the survey began in 2004, sliding by 12 points to 86 last month.

A number of retail and leisure companies have also warned of problems and that they are seeing a slowdown in demand on the High Street.

BBC economics editor Evan Davis said that it was this apparent downturn which made a rate cut more likely.

"It would be about making sure that the slowdown, which seems to be happening, does not get out of control," he said.

"We want the economy to turn but we do not want it to turn too sharply."

'Radical action'

Many financial industry experts are now warning that tougher times lie ahead because of the continuing impact of problems in the US housing market, which triggered a credit crunch and are rippling out across the globe.

According to Howard Wheeldon of BGC Partners, the challenges facing the UK economy are "serious".

"Not only do the abnormalities of this credit market crisis threaten to destroy corporate growth," he said.

"But unless they are addressed by some radical action on rates, then they risk destroying any prospect of economic growth in 2008."

Experts have said that even if a cut was made to rates, most lenders would be unlikely to pass it on in full to mortgage borrowers.



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