LONDON (Bloomberg) - The Bank of England, struggling to fend off an economic slowdown, may instead be giving itself a new inflation headache.

The Monetary Policy Committee cut its key interest rate by a quarter point to 5.5 percent on Wednesday, citing risks to growth from financial markets that have "deteriorated."

That's an about-face from two weeks ago when Governor Mervyn King said the price outlook was "less benign."

The reduction, the first in two years, may make it harder to keep consumer prices under control. Britons' expectations for the cost of living are the highest in two years, and inflation accelerated above the central bank's two percent target for the first time in four months in October.

The bank acted after credit costs surged, reports showed the housing market is nearing recession and services from banks to airlines expanded at the slowest in four years in November. The change contrasts with the response of the European Central Bank, some of whose policy makers on Wednesday wanted to raise rates.

The Bank of England, which sets rates by majority decision, will say how the nine members of the committee voted on December 19, when minutes of the gathering are released. Economists surveyed by Bloomberg before the rate announcement were the most split on the outcome in three years.

"It is pretty likely that this was not a unanimous decision," said Peter Dixon, an economist at Commerzbank AG in London. "There was a good case for rates to be left on hold a little longer to avoid the view that the Bank of England is prepared to cave in at the first sign of problems in the housing market."

The danger for the central bank is that it repeats the mistake of its last rate reduction in August 2005, when policy makers outvoted King and lowered borrowing costs in response to signs of an economic slowdown. The decision reignited a housing boom, and inflation accelerated to a record 19 months later.

Mortgage lenders including HBOS Plc and Nationwide Building Society immediately reduced their main lending rates in response to the central bank's cut.

The Bank of England joins the US Federal Reserve and the Bank of Canada in lowering interest rates. Goldman Sachs Group Inc. said on December 5 the US housing recession is "morphing into a global shock" that will slow growth around the world.

Lower rates and the possibility of a revival in the housing market may help Prime Minister Gordon Brown as he attempts to revive the Labour government's popularity, which touched a 19- year low last month, according to pollster ComRes.

Opposition lawmakers have criticized Brown, who served as finance minister for a decade before taking over from Tony Blair in June, for encouraging consumers to rack up a record debt burden, which fueled a tripling of house prices since 1997.

Some economists praised the Bank of England, which was criticized in August and September for not responding fast enough to the onset of the credit market rout.

"The Bank of England was right to cut rates," said Nick Kounis, an economist at Fortis in the Netherlands and a former Treasury official. "The UK is vulnerable to headwinds from the credit squeeze, and interest rates were already at a restrictive level."

Economic growth slowed in the three months through November to 0.6 percent, compared with a 0.7 percent pace in the quarter to the end of August, the National Institute of Economic and Social Research said in an estimate published today. The group's clients include the central bank and the Treasury.

Still, inflation accelerated to 2.1 percent in October and may stay above the target "in the short term," and there are still "upside risks," the central bank said on Wednesday.

"We forget somehow that the economy has been growing very quickly recently," said Ruth Lea, an economic adviser to Arbuthnot Banking Group in London and a former Treasury official. "The truth is that inflation pressures are picking up. Under those circumstances it's going to be more difficult for the bank to hit its 2 percent target."