As the bank began its two-day meeting on Wednesday, analysts said that waning inflationary pressures have given the central bank scope for another hefty cut from the current 2 per cent.

The nine-strong Monetary Policy Committee has already slashed rates by 3 percentage points since the beginning of October as Britain's economy faces its bleakest year since the early 1990s recession.

'We think that a 1 percentage point cut tomorrow is very possible,' said Capital Economics' Vicky Redwood. 'And even if the MPC does now start to proceed more cautiously with a smaller cut, we still think that rates will end up at, or close to, zero before long.'

Any cut announced at the end of the bank's meeting on Thursday will automatically provide the lowest rate in the bank's 315-year history.

Yet whether the lower rates will have the desired impact of jump-starting the economy is debatable, as many banks and other lenders have been slow to pass on previous cuts.

Nationwide, the country's biggest building society, has already said it plans to invoke a 'collar' clause enabling it to stop reducing rates on most of its tracker mortgages, which are designed to follow the benchmark interest rate.

In contrast, banks have been quick to pass on the lower rates to savers, who have watched the value of their nest eggs decline in real terms. Lower savings are unlikely to encourage consumer spending.

Bank of England policy makers have a raft of poor economic data to consider as they debate their decision at this month's two day meeting.

House prices have suffered their worst year on record, falling by nearly 16 percent and the service sector, which makes up 75 per cent of the economy, shrank at a near record pace in December, according to two separate surveys on Tuesday.

Casualties are mounting in the retail sector, where general store Woolworths, music and book chain Zavvi and traditional tea and coffee merchant Whittards have all filed for bankruptcy protection.

The collapse of several retailers, and cutbacks by many others, has already cost tens of thousands of jobs.

The Society of Motor Manufacturers and Traders revealed on Wednesday that new car sales slumped 11.3 per cent over 2008, compared to 2007.

And a warning in the Bank of England's latest credit conditions survey that lending to households and businesses is set to fall further in the first quarter of this year is likely to lead to more house price falls, corporate failures, and rising unemployment.

Prime Minister Gordon Brown has said that with interest rates close to zero, the government should take fiscal action, hinting at further tax cuts and increased government spending.

The contraction in the economy has changed the focus of central bank policy makers who were until recently concerned about runaway inflation - the consumer price index is currently at 4.1 per cent, far above the government's 2 per cent target.

Policy makers are now more worried about inflation falling below target or turning negative. Deflation, a sustained drop in prices, can be disastrous for an economy by discouraging people from spending as wages fall and unemployment rises. -- AP