By William Schomberg
LONDON (Reuters) - The Bank of England will deliver its most hotly awaited policy decision in years on Thursday, when it will either raise borrowing costs from an all-time low or say it is waiting to ensure the post-lockdown economy is ready for a rate hike.
The British central bank is due to make its announcement at 1200 GMT.
Investors have fully priced in an increase in Bank Rate to 0.25% from 0.1%, which would make the BoE the first of the world's big central banks to raise rates since the coronavirus pandemic hit. Economists are far less certain.
The Federal Reserve said on Wednesday it would start scaling back its bond-buying programme this month, a first step towards a first U.S. rate hike not expected until mid-2022.
European Central Bank President Christine Lagarde said on Wednesday the ECB was very unlikely to raise rates next year.
Economists who closely follow the BoE are more divided than investors about the likelihood of a hike on Thursday.
A Reuters poll published last week showed most analysts thought the BoE would keep rates on hold, although many said the decision was too close to call.
Ana Boata, head of economic research at Euler Hermes, part of Allianz, said the BoE faced the opposing challenges of inflation set to more than double its 2% target and a squeeze on household spending as the government scales back stimulus aid, including its jobs support scheme, and raises taxes.
Britain's economy is also facing risks from post-Brexit trade frictions and a recent rise in COVID-19 cases.
The BoE may trim its growth forecast for next year as part of a quarterly update to its outlook.
"By not acting, (the BoE) risks creating even more inflation," Boata said.
"However, embarking on an earlier monetary policy tightening cycle is premature and could raise the risks of a technical recession, especially as the UK will be the first major economy to start fiscal consolidation in 2022."
BoE Governor Andrew Bailey has talked of the need to act to contain inflation expectations and three more of the bank's nine policymakers have voiced similar concerns.
But another two say raising rates now would do nothing to address the main driver of inflation - the sudden reopening of the world economy that has caused bottlenecks and supply problems.
The remaining three MPC members have not made clear comments about their views in public for weeks, leaving the outcome of the meeting on a knife edge.
The BoE will also announce whether it will allow its 895 billion-pound ($1.22 trillion) bond-buying programme to complete as planned.
In September, two MPC members voted to stop the purchases early because of signs that the economy was recovering quickly from its near 10% coronavirus-induced crash in 2020.
But Bailey and his colleagues have said it is possible that they could raise rates while still allowing the quantitative easing (QE) programme to run its course.
Bailey will lead a news conference at 1230 GMT when he may have to answer awkward questions, whatever the MPC's decision.
"The BoE will face a challenge in explaining the consistency of its decisions on QE and rates with the current macro backdrop and its recent communications," Allan Monks, an economist at JP Morgan, said.
While economists are split on the chance of a rate hike on Thursday, they are more in agreement that the BoE will try to steer investors away from bets that rates will rise steadily through 2022 and hit about 1.25% by the end of next year.
The BoE might choose to do that projecting a fall in inflation below 2% in two to three years' time, based on current market pricing.
($1 = 0.7321 pounds)
(Writing by William Schomberg; editing by John Stonestreet)