It is unlikely the Bank of England or the European Central Bank will follow their American counterpart and cut interest rates on Thursday. But the markets are still expecting an easing of monetary policy in the UK by early next year. Is this realistic?

To answer that it is useful to remind ourselves of how much expectations have changed.

No more than five weeks ago, nearly a third of economists polled by Bloomberg forecast the Bank would soon be raising rates by 25 basis points to 6 per cent as it sought to cool demand and ensure inflation remained close to its 2 per cent target.

A dislocated credit market and the subsequent bail-out of Northern Rock quickly put paid to that notion and by the end of last week, one in four analysts was forecasting a cut to 5.5 per cent in November, according to Bloomberg.

The reasoning was that the damage to consumer sentiment inflicted by savers queuing on a British high street and the difficulties some institutions had securing funding was already crimping demand.

But since that survey, equity markets have rallied to pre-funk levels. Credit markets are, by and large, less sclerotic and there is the sweet murmur of returning M&A. Consequently, the Bank should be allowed to focus on the economic data. This is less reassuring for those wanting a rate cut.

There is little evidence yet that the summer’s shenanigans have derailed UK growth. Granted, a survey on the service sector on Wednesday showed slower expansion in September. But activity was still robust and, critically, inflationary pressures show no sign of abating.

Equities have rallied partly in the hope that the Bank will be convinced the fallout from the credit woes will outweigh its concerns about inflation.

But as Alan Clarke at BNP Paribas said: “If a bank crisis can’t cause a big fall [in activity], what can?”

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