LONDON, July 30 (Reuters) - The Bank of England is expected to leave interest rates at their record low next week and for the rest of this year, as policymakers try to shore up the recovery in the face of deep government spending cuts.
The Monetary Policy Committee will have their latest growth and inflation forecasts to hand for their Aug 4-5 meeting, and given Governor Mervyn King's dovish comments this week, they may show a softer outlook for growth over the two-year horizon, though a higher inflation profile.
King told parliament's Treasury Committee this week that the recovery was still far from assured and that if anything, the policy debate centered on how much stimulus was still needed, rather than when to start withdrawing support.
He noted the economy still faced significant risks fron planned government spending cuts, constraints on bank lending and weak conditions around the world.
None of the 61 economists in a Reuters poll taken between July 27-29 thinks the BoE will raise rates next week and they have scaled back forecasts for future tightening and now see rates at 0.75 percent in Q2 2011, down from 1 percent in the July 1 poll.
Following is a summary of the main factors the MPC are likely to discuss at their meeting next week.
ECONOMIC GROWTH
Britain's economy expanded by 1.1 percent between April and June -- almost twice as fast as expected and its fastest pace in 4 years -- thanks to a surge in output in the services, construction and industrials sectors.
However, most economists are doubtful that the pace of growth will be maintained once government spending cuts start to kick in, while weak growth and fiscal tightening in Britain's main export markets are also likely to impact on the recovery.
BoE policymakers have pointed out that although growth rates are likely to be strong as the economy rebounds from its deepest recession since World War Two, it could take years for economic output to return to its pre-downturn level.
As such, the second-quarter GDP data are unlikely to alter their view that the outlook for growth remains highly uncertain.
INFLATION
Consumer price inflation eased back as expected in June to stand at 3.2 percent, its lowest since February, but still more than a percentage point above the BoE's 2 percent target.
Both King and BoE chief economist Spencer Dale have noted that the 2.5 percentage point rise in value added tax to 20 percent from January is likely to keep inflation above target throughout 2011.
Policymakers have also been surprised by the extent of the impact on inflation from the past depreciation in sterling, and a major worry for them is that rising prices will become entrenched in people's expectations.
However, a survey by Citi/YouGov showed the public's inflation expectations eased this month and wage growth has slowed, and is unlikely to pick up much due to the cash-flow pressures facing many businesses.
FISCAL POLICY
Britain's coalition government has made cutting the public deficit a top priority to protect the nation's sovereign rating and keep long-term borrowing costs down.
Finance minister George Osborne's emergency budget in June projected a 25 percent cut in government spending over the coming four years.
With some areas ring-fenced, many departments face budget cuts of up to a third. This is likely to result in around half a million job cuts in the public sector -- which employs a fifth of Britain's workforce.
The government aims to reduce a deficit of 11 percent of GDP to next to nothing over the course of this parliament, but the price could be slower growth, at least for the next two years.
LENDING
Bank lending to businesses has been falling in recent months and the BoE's preferred gauge of M4 money supply growth -- excluding intermediate other financial corporations slowed markedly to 0.2 percent in June from 0.9 percent growth in May.
King cited continued weak credit flows as posing a major risk to Britain's economic recovery and urged the government to examine the role of state-owned banks in boosting lending to businesses.
The government this week launched a consultation into how to encourage banks to lend more freely and is looking into slapping a levy on profits if they are deemed to be paying dividends and bonuses at the expense of lending.
Other possible measures to promote lending include developing smaller, regional stock exchanges and a national guarantee scheme. Keywords: BRITAIN BANK/FACTORS
(Reporting by Fiona Shaikh; Editing by David Brough; Reuters Messaging:fiona.shaikh.reuters.com@reuters.net; Tel. +44 207 542 2774)
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