The Bank of England left interest rates on hold at 5.0 percent for a fifth month running on Thursday, but most economists expect sharp cuts next year. With inflation more than double the central bank's 2 percent target, all 67 economists polled by Reuters had expected the Monetary Policy Committee to keep rates unchanged.
Still, interest rate futures slipped as some investors had priced in the outside chance of a cut due to the speed and scale of Britain's economic slowdown. Money markets are pricing in a good chance of three quarter-percentage point cuts by this time next year.
"We continue to see rates being cut - but not until next year when the inflation peak should have passed," said George Buckley, chief UK economist at Deutsche Bank.
Recent economic news in Britain has been unremittingly grim. House prices are tumbling, unemployment is rising and consumer confidence is at rock-bottom. Figures out just before the BoE decision showed house prices fell a record 12.7 percent on the year in August, according to Britain's biggest mortgage lender HBOS. New car registrations also fell 18.6 percent on the year in August to the weakest number of sales since 1966.
The BoE's nine-member Monetary Policy Committee was split three ways last month. Tim Besley wanted to raise rates to make sure high inflation did not spread through the economy.
But David Blanchflower wanted to cut rates to ease the economic pain and has since signalled that he might have voted for a half-point cut in borrowing costs this month. The remaining seven, including Governor Mervyn King, thought no change was the best option due to the competing risks and a similar analysis is expected to have taken place at this month's meeting.