By Nathalie Knowles BBC Radio 4's Money Box

Interest rates may be cut for the first time in a year when the Bank of England Monetary Policy Committee meets on Wednesday and Thursday.

Similar meetings will take place across the world, with the European Central Bank also meeting on Thursday and the US Federal Reserve making its decision a day earlier.

Although the MPC will not comment ahead of the meeting, it is widely expected that UK rates will be cut for the first time since November 2001.

Cutting rates encourages consumer spending and the resulting demand would push up prices, nudging inflation towards its target of 2.5%.

But lower rates also lead to cheaper loans, bigger debts, and large rises in house prices.

Deflation

BBC Radio 4's Money Box programme spoke to DeAnne Julius a former member of the Monetary Policy Committee on how she would vote if she were still part of the decision making body.

Ms Julius confirmed she would vote for a cut and put the figure at 0.25%, saying further cuts may be necessary later to counter the risk of deflation.

"I think [this] is the biggest worry the MPC must have to think about.

"If that is the direction we are going we need to leave a little ammunition still in our pack to be able to cut interest rates later, so I would not go overboard right now."

Asked what effect a cut in rates would have on the economy, she replied:

"It will change peoples' expectations about rates and anyone who is on the market for a mortgage will begin to think that maybe it is better to get a floating rate than a fixed rate mortgage if interest rates are still on their way down.

"So there will be some changes in financial markets and people who are right on the brink of making a financial decision.

"But the big effects on consumption and investment will take longer to affect the economy."

Germany

Ms Julius said that although deflation affecting the entire economy is not the most likely scenario it remains a significant risk for the UK and a likelihood for Germany.

"In my opinion it is the biggest economic risk that we face at the moment.

"I remember how remote that risk would have to seemed for Japan if we had been having this discussion 10 years ago and yet Japan has been in a deflationary situation for 4 yrs now.

"Germany is probably the next country to go into that. I think it is less likely here than in Germany but is certainly not impossible at all."

And if deflation does occur it would bring with it many problems as Ms Julius explained:

"If prices fall across the whole economy then that creates a situation where Monetary policy is not very effective. Interest rates cannot go below zero.

"So you would have lost some control that you otherwise have over the economy and that is frightening.

"It is also dangerous because many households and businesses have significant debt and in a deflationary environment the value of that debt stays the same, while the income people are receiving... for their goods is falling, so debt becomes an even bigger burden."