What: Bank of England's March monetary policy decision

When: Thursday, March 10 at 7 a.m. ET

By Christina Fincher

LONDON - The Bank of England looks set to keep interest rates at a record low this Thursday, judging that Britain's recovery is currently too fragile to sustain a spiral of rising prices.

It is not a foregone conclusion, however. Some policymakers are growing increasingly nervous about the threat of inflation, and three of the nine-strong Monetary Policy Committee voted to raise interest rates in February.

Markets are pricing in a 10 percent probability of a rate rise this week, half the chance they ascribed for a move in February, which would have coincided with the BoE's quarterly economic forecasting round.

Nonetheless, investors will be nervous. Oil prices have surged to two-year highs above $117 a barrel and the European Central Bank has already signaled it is likely to raise rates this month, despite an inflation rate well below Britain's.

Consumer price inflation in Britain hit 4 percent in January, almost twice the euro zone's 2.4 percent, and is still rising.

The key argument for keeping UK interest rates on hold is the weakness of the economy.

Unlike its main trading partners, Britain suffered a shock 0.6 percent contraction in the final quarter of last year. While surveys suggest the manufacturing and construction sectors have both recovered, the country's dominant service sector is still struggling.

Given the considerable downside risks, raising rates too early could prove to be a catastrophic misjudgment, said Investec economist Philip Shaw.

FOCUS ON MAY

The Bank of England may be particularly wary of rocking the boat just weeks before the government's March 23 Budget.

Since it was made independent in 1997, the BoE has only ever made one monetary policy change in the month of March and that was two years ago when it slashed rates to 0.5 percent and launched its unprecedented quantitative easing programme.

The government announced a Draconian four-year fiscal tightening program last year but the bulk of the fiscal pain has yet to come.

Most investors are betting the BoE will keep its powder dry until May or June, when its decision will be informed by a preliminary estimate of first-quarter GDP and a new set of growth and inflation forecasts.

Money markets are fully pricing in around a 75 percent chance of a quarter percentage point rate hike in May, with the likelihood of two more before the end of the year.

Many economists have brought forward their rate rise forecasts in recent months, but are still lagging. A Reuters poll of 63 economists last week shows most don't expect any rise in rates until the third quarter of the year.

Only one thought the BoE would raise rates as early as March.

Continued uncertainty about the underlying strength of the UK recovery should prompt the Monetary Policy Committee to keep interest rates on hold at this week's meeting, said Vicky Redwood at Capital Economics.

The real danger point could come in May when the economic picture should be a bit clearer.

(Editing by Ron Askew)

United kingdom