The Bank of England looks set to keep interest rates at a record low on Thursday -- and probably for the rest of this year -- as it seeks to bolster Britain's fragile recovery and offset painful government spending cuts.

Although inflation has jumped to almost double the central bank's 2 percent target, most members of the bank's monetary policy committee reckon these price pressures will be short-lived.

For now, the risks to the recovery from the biggest fiscal squeeze in a generation and a slowdown in the euro zone, Britain's biggest trading partner, are likely to hold sway.

Britain's new coalition government will publish its first budget on June 22. It is likely to contain a mix of spending cuts and tax rises that could have a profound impact on both growth and inflation.

The BoE will not want to take action before it knows what scale of fiscal tightening will be delivered in the budget, said Marc Ostwald, an economist at Monument Securities. The implications of the euro zone debt crisis also argue against doing anything precipitous.

All 61 analysts polled by Reuters reckon UK interest rates will stay at 0.5 percent when the BoE ends its two-day policy meeting at 1100 GMT and most do not expect any tightening until early 2011.

Minutes to the BoE's latest policy meeting show some members are worried inflation may not subside as quickly as expected. But while April's rise in inflation to 3.7 percent surprised most analysts, bond markets show investors are betting on an increasingly benign inflation outlook.

STRONG HEADWINDS

Despite unprecedented monetary stimulus -- including the injection of 200 billion pounds ($288.8 billion) into the economy in the form of quantitative easing -- Britain's recovery from its deepest recession since World War Two has been relatively muted.

The economy grew 0.3 percent in the first three months of this year, slower than the 0.4 percent achieved in the last quarter of 2009 and weaker than the BoE had initially forecast.

There are fears that mass lay-offs in the public-sector, which employs a fifth of Britain's workforce, could prompt a renewed weakening in the second half of the year.

Finance minister George Osborne has pledged to cut the country's budget deficit, currently at almost 11 percent of GDP, at a significantly accelerated pace, starting with 6 billion pounds of cuts this year.

With the euro zone suffering similar spending cuts, hopes of an export-led recovery also look misplaced.

Relative muted recovery following deep recession, the looming major fiscal squeeze and the risk to UK economic activity coming from the euro zone debt crisis make a strong case for the BoE to keep its finger off the interest rate trigger, said Howard Archer, an economist at IHS Global Insight.

(Editing by Toby Chopra)

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