SCENARIOS - Bank faces tough call on QE expansion 

Bank of England policymakers face an unusually tough decision this week: whether to expand the 175 billion pound asset purchase programme at a time when Britain is showing signs of recovery but remains stuck in recession. Skip related content

And new data on Wednesday showing service sector activity grew at its fastest pace since before the credit crunch has thrown more confusion into the mix.

Two-thirds of analysts polled by Reuters last week reckoned the central bank would expand its quantitative easing (QE) programme, with opinion evenly split between a 25 billion pound and 50 billion pound increase.

But a significant minority -- 16 economists -- reckoned policymakers would call a halt.

Following is a summary of possible scenarios for the BoE's decision, which will be announced at 1200 GMT on Thursday.

BOE UPS QE BY 25 BLN STG, HOLDS INTEREST RATES AT 0.5 PCT

Policymakers have already noted the "substantial" impact of the QE programme on asset prices, and may view a smaller expansion of the scheme and a slower pace of purchases as a way of providing support to the economy as it emerges from recession.

Even an unexpectedly strong reading on October's services PMI survey, which put activity growth at a 2-year high, may not deter policymakers from delivering a final stimulus to secure growth and avoid the violent market reaction that may be provoked by calling an outright halt to the scheme.

* Probability: joint front-runner

* Market impact: Gilt prices could sell off modestly, driving the yield on 10-year gilts up around 5-10 basis points on the day, on disappointment that a bigger extension was not delivered. Yields are seen correcting by 30-40 basis points thereafter on the perception the central bank is winding down its asset-buying programme.

The net impact on sterling is likely to be neutral, with any impact dependent on the wording of the BoE's accompanying statement.

BOE UPS QE BY 50 BLN STG, HOLDS RATES

A shock 0.4 percent contraction in GDP in the third quarter may have persuaded policymakers they need to inject more stimulus into the economy to bring it back on track for growth. The central bank's August projections had pencilled in a modest expansion for the quarter and although rate-setters have warned the road to recovery may be long and bumpy, they may be minded to err on the side of caution.

Although Wednesday's services PMI data have not tempted those analysts who predict a bigger QE expansion to abandon their calls, some now see a slightly smaller chance of a 50 billion pound top-up.

* Probability: joint front-runner

* Market impact: Gilts would rally, pushing down the yield on 10-year gilts by as much as 10 basis points. However, much depends on how the market reacts to around 7 billion pounds of supply this week and the closely-watched CIPS/Markit services PMI, due on Wednesday.

Analysts noted that sterling fell for a whole week after the BoE's 50 billion pound top-up in August and predict a similarly marked response if policymakers deliver a similar boost this time round, and strike a downbeat tone about the economy.

Strategists see sterling falling to as low as 91 or 92 pence against the euro intitally, but recovering ground to beyond 90 pence in the following months.

BOE PAUSES QE, HOLDS RATES

A rebound in asset prices, this week's unexpectedly strong manufacturing and services PMI surveys, a slower-than-feared rise in unemployment and a recent improvement in consumer morale have provided encouraging news on the economy and may persuade policymakers they have done enough to stimulate growth.

BoE Chief Economist Spencer Dale has expressed concern about an unwarranted rise in asset prices as a result of QE and has spoken of the challenge in unwinding the programme.

Moreover, minutes to last month's meeting omitted any mention that Governor Mervyn King and David Miles -- who had wanted a top-up to 200 billion pounds in August and still felt their call was justified in September -- remained committed to that view, causing a sell-off in gilts.

* Probability: Around 25 percent

* Market impact: A 15-20 basis point jump in the 10-year gilt yield on the day, depending on the accompanying statement. Analysts reckon the ten-year yield could rise by as much as 50 basis points in the following months, taking it back up to its pre-QE levels of over 4 percent.

Sterling is likely to rally strongly, having already hit a one-week high against the euro after the services PMI, with investors encouraged by the more optimistic growth outlook implied by the BoE's decision to pause the asset purchase scheme.

Some analysts see the pound strengthening to as high as 88 pence against the euro, its highest since mid-September.

BOE PAUSES QE, LOWER RESERVES REMUNERATION RATE

Talk of a cut in the 0.5 percent rate the BoE pays on commercial banks' reserves has resurfaced in recent weeks, even though the central bank has said such a measure is still only being looked into by bank staff.

Still, analysts reckon it may yet be one way to discourage banks from hoarding cash and boosting the effectiveness of the QE programme.

* Probability: very low

* Market impact: Short-dated gilts would rally, driving down yields. A cut in the remuneration rate would put pressure on the pound although this might be offset by the ending of QE purchases.

(Reporting by Fiona Shaikh; Editing by Andy Bruce)