Bank of England to head back to the sidelines as global growth slows

[LONDON] The Bank of England (BoE) is expected to show on Thursday that interest rates are back on hold while it waits for signs of turnarounds in the slowing global economy and fading British wage growth.

Governor Mark Carney has made it clear over the past two weeks that the BoE will not join a recent round of action by other central banks, such as the US Federal Reserve's first rate hike since 2007 and the Bank of Japan's move into negative borrowing costs.

Investors will take their cue for how long the BoE is likely to remain on the sidelines from the Bank's latest economic forecasts, which it is due to publish at 1200 GMT, alongside its expected decision to keep rates on hold again. Mr Carney will give a news conference at 1230 GMT.

Last year the BoE seemed to be preparing the ground for its first interest rate hike since 2007, after years of record-low 0.5 per cent borrowing costs in the wake of the financial crisis.

But that was before financial markets went into their latest tailspin over China's slowing economy, oil prices plunged again and a recovery in pay in Britain fizzled out.

"It's quite striking how much has changed (since) the November inflation report," said David Tinsley, economist at UBS.

"(Policymakers) are going to find it quite hard to have a clear steer on where their new projections are going to lie relative to their November ones."

Further complicating the outlook, Prime Minister David Cameron is expected to call a referendum on Britain's place in the European Union in the coming months, which will unsettle investors and add to reasons for the BoE to sit tight.

As a result, the bank is expected to sound cautious on Thursday. It is likely to say Britain's near-zero inflation will inch up even more slowly this year than it forecast in its last inflation report just three months ago.

Then, it said inflation would remain under 1 per cent until the middle of this year. On Wednesday, the National Institute of Economic and Social Research, a think-tank, said consumer prices would only rise 0.3 per cent this year.

If the BoE predicts an inflation rate that low for 2016 and cuts its growth forecast for Britain's economy this year, investors might add to their bets that interest rates will not rise for yet another two years.

Financial markets were recently pricing in a slim chance of a cut in borrowing costs this year.

But some economists expect that the Bank will also increase its expectations for inflation in two and three years' time to above its 2 per cent target. That would act as a signal that it believes markets are too pessimistic about the chance of a pick-up in growth and inflation.

Mr Carney said last week he expected solid growth among the world's rich economies even if emerging nations were slowing, and surveys published this week suggested Britain had a better-than-expected start to the year.

Economists polled by Reuters expect the Bank to raise interest rates in November this year.

REUTERS