What The Bank Of England Has To Weigh Up Next Week

Official measures of retail sales activity have surprised on the upside recently, contrasting with gloomy news from retailers themselves.

The Bank of England is expected to follow up December's 100 basis point rate cut with at least another 50 basis point reduction next week amid growing signs the economic downturn is gathering pace.

Money markets are pricing in an 80 percent chance the Monetary Policy Committee will slice borrowing costs to 1.25 percent from the current 2 percent, taking the Bank rate to its lowest since the BoE was founded in 1694.

Some policymakers have said the bank may eventually have to cut interest rates to zero and resort to quantitative easing -- essentially printing more money to buoy the economy. Below are a range of points likely to feature in the Monetary Policy Committee's discussions.

INFLATION

Consumer price inflation has continued to ease, falling to 4.1 percent in November -- still double the BoE's 2 percent target. In a letter to finance minister Alistair Darling, explaining the overshoot, BoE Governor Mervyn King said it was likely that inflation would fall more than one percentage point below the target this year.

GROWTH

A final reading of gross domestic product published before Christmas, showed the economy shrank by 0.6 percent in the third quarter of this year, worse than initially estimated.

And things are likely to get much worse in 2009, with surveys pointing to a marked contraction in the manufacturing and services sectors. Consumption, long the mainstay of economic growth, is also likely to suffer amid rising unemployment and tight credit conditions.

HOUSE PRICES

House prices are continuing to fall at a record rate, with Britain's largest mortgage lender, Halifax, reporting a 16.2 percent annual decline in the three months to December.

Prices have already fallen 20 percent from their 2007 peak on this measure and further declines are likely as approvals for new home loans have hit a record low, according to BoE data.

LABOUR MARKET

The number of people claiming jobless benefit surged past 1 million in November, climbing at its fastest rate since the recession of the early 1990s. The credit crunch has led to thousands of job cuts in the financial services industry, but workers are being laid off in most sectors as firms cut costs to cope with falling demand.

CONSUMER SPENDING

Official measures of retail sales activity have surprised on the upside recently, contrasting with gloomy news from retailers themselves.

Several High Street stores have gone out of business in recent weeks, including the century-old Woolworths, tea retailers Whittards, CD and DVD retailer Zavvi and childrens' clothing chain Adams.

And stores have been slashing prices to shift their Christmas stock. Retail bellwether John Lewis reported a surge in sales in the days immediately before and after Christmas but experts reckon any pick up in demand will be short-lived as consumers start scaling back in the New Year.