LONDON (Reuters) - The Bank of England looks set to hold off from cutting interest rates tomorrow as policymakers' worries about higher inflation trump their fears that the British economy is slowing fast.

Only two out of 71 analysts polled by Reuters last week expected the central bank's Monetary Policy Committee to chop borrowing costs this month. The rest predicted rates would stay at five percent for a second month running, and probably for a while longer.

That's a far cry from a few weeks ago when a majority were gunning for rapid rate reductions, as house prices are sliding and the economy is suffering from the global credit crunch. April's inflation number shocked both analysts and the MPC, showing a jump in the annual rate to three percent, a full percentage point above the central bank's target.

Policymakers therefore cannot cut rates when their mandate is to keep inflation at two percent without risking their credibility, say economists.

"It appears to be a stone dead certainty that interest rates will remain at five percent even though the economy continues to weaken and house prices are currently heading south at an increasing rate," said Howard Archer, economist at Global Insight. "This reflects the fact that inflation pressures and risks have increased appreciably, despite the ongoing slowdown in growth. Indeed, the question increasingly is will the Bank of England cut interest rates again before the end of the year?"

Financial markets are pricing in a rate rise by the year-end, as they are in the euro zone and United States too. But BoE policymakers have given little indication that they are even beginning to consider this while the economy is vulnerable.

The BoE now expects inflation will eventually come down gradually, allowing it room to cut rates later in 2008, particularly if the activity data keep weakening.

"Our view is that markets are misjudging the interest rate outlook," said Philip Shaw, chief economist at Investec. "While interest rates are unlikely to come down soon, the economy is too fragile for the MPC to raise rates."

The MPC believes markets underestimated the inflation risks for some time, and they may now be doing the same for the risk that economic growth will slow sharply. BoE Governor Mervyn King will get the chance to set the record straight next week when he makes a major policy speech.