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First Bank of England hike still seen in Q1 but economists less sure: Reuters poll

A rise in British interest rates in the first quarter of 2015 is now much less certain, according to a Reuters poll in which almost half the economists questioned thought the hike would come later in the year.

[LONDON] A rise in British interest rates in the first quarter of 2015 is now much less certain, according to a Reuters poll in which almost half the economists questioned thought the hike would come later in the year.

A wafer-thin majority, 28 of 54 economists, stuck to their calls for the initial hike to come in the first quarter. In an Oct 1 poll 54 of 60 economists had expected the Bank of England to act before April.

British rates have been at an all-time low of 0.5 per cent since the depths of the financial crisis in early 2009, but with the economy exhibiting some of the healthiest growth rates among developed nations, economists in Reuters polls since June have been targeting the first three months of 2015 for the first rise in Bank Rate.

However, short sterling interest rate futures are now not fully pricing in the first rise until the second quarter.

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If a first quarter hike is realised, it means the BoE would begin tightening policy before the US Federal Reserve, which is expected to end its bond buying programme later on Wednesday.

Markets have likely paid attention to recent speeches from members of the Bank's Monetary Policy Committee that have highlighted their wish to see increased inflationary pressures before voting for a UK rate rise.

Economists may be focussing more on data pointing to an improving economy. "In light of recent market moves and comments from MPC members, it's tempting to conclude that UK interest rates will be on hold for a long time," said Simon Wells, chief UK economist at HSBC.

"Clearly, downside risks have risen but a modest slowdown was always expected. It is too early to conclude that policy won't tighten in Q1." Minutes from the Bank's October meeting showed most MPC members were firmly against raising interest rates, seeing little evidence of inflation pressures while the slowing eurozone poses growing risks.

Inflation in Britain fell to 1.2 per cent at its latest measure, well below the BoE's 2.0 per cent target. But inflation is much lower in the eurozone, last at 0.3 per cent, with many euro area member economies now seeing deflation.

Respondents in the poll cited lower inflation or weaker growth in the UK and abroad as key factors that could push them to move their forecasts to later in the year.

Two MPC members voted for a hike in October, as they have done since August, but none of the 54 economists polled expect any shift when the latest policy decision is released on Nov. 6.

There was a median 60 per cent chance Bank Rate would rise before July and an 80 per cent near certainty of a hike before 2015 is out.

Respondents were also all convinced that any rises, when they come, will only be gradual. That ties in with a recent Reuters poll where no-one saw inflation averaging much higher than target through to 2016.

Medians showed Bank Rate would be at 1.25 per cent at the end of next year and 2.00 per cent at the end of 2016, unchanged from an Oct 16 poll.

The Bank will need to see more signs of price pressures building before it raises rates, Deputy Governor Minouche Shafik said on Monday. Her fellow deputy, Jon Cunliffe, said on Tuesday the Bank can afford to keep rates at their current low for longer than first thought.

And earlier this month the Bank's chief economist, Andrew Haldane, was similarly downbeat about the outlook for the economy, citing weaker global growth, greater financial and political risks and the danger that wages and productivity might continue to fail to recover as forecast. "Put in rather plainer English, I am gloomier," Mr Haldane said. "This implies interest rates could remain lower for longer, certainly than I had expected three months ago." However, Martin Weale and Ian McCafferty, who wanted a 25 basis point rise, said keeping rates at their record low could unbalance Britain's economic recovery and that the lagged effect of interest rate rises meant an increase now was needed.

Britain's growth rate has recently easily outpaced its European peers. And while inflation was just 1.2 per cent in September, it is expected to rise in the coming year, reaching target towards the end of 2015.

Wage growth, which Bank Governor Mark Carney has highlighted as a factor in determining when rates should rise, should outpace stubbornly low inflation early next year. "The data warrants an increase and wage deals at the turn of the year might be enough to swing it," said Daniel Vernazza, UK economist at UniCredit, who expects the first hike early next year.