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Bank of England rate hike looking more likely late this year

[LONDON] The Bank of England will keep interest rates at a record low until at least October as inflation remains stubbornly below target, according to economists in a Reuters poll who have grown more confident about their views.

Forty-nine of 60 economists surveyed this week do not expect any move from 0.5 per cent before October, whereas in a poll taken just under two weeks ago, 21 of 44 did. In a poll taken ahead of the British central bank's December policy meeting, 45 of 51 had pencilled in a rate move before October.

Financial markets are even more cautious and are now not fully pricing in a move until early next year.

As recently as October, economists were calling for a hike in the current quarter. But four of the five Reuters polls since then have seen the timing pushed back by three months.

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The firming of the consensus view for the fourth quarter of 2015 comes just days after the European Central Bank announced a quantitative easing programme worth more than 1 trillion euros.

It also follows decisions in the past few weeks by multiple central banks, from Switzerland to Turkey to Canada, and on Wednesday, Singapore.

In contrast, the United States Federal Reserve is still likely to begin raising interest rates in June. Expectations US and British interest rates will diverge have helped push sterling over 2 per cent lower to the dollar this year.

Inflation turned negative in the euro zone last month despite many attempts by the central bank which fell short of QE to prop it up to the ECB's target of just below 2 per cent.

The BoE, which closed its own QE programme a few years ago, is also grappling with falling inflation, which at 0.5 per cent is far below its own 2 per cent goal.

Brent crude oil prices have tumbled around 60 per cent since June and a poll taken two weeks ago did not expect inflation to reach 2 per cent until July 2016 at the earliest, giving the Monetary Policy Committee very little reason to tighten policy.

"With this backdrop and the prospect of extended ECB QE, we are postponing our forecast for the first UK rate hike from November 2015 to February 2016, with a fairly gradual tightening cycle thereafter," said Citi's chief UK economist Michael Saunders.

The BoE's chief economist said on Wednesday that when the Bank does start raising interest rates, the increase could be as slow as half a percentage point a year.

"We are in no rush to raise rates, the recovery is taking hold nicely. The last thing we want to do is knock the stuffing out of that," Andy Haldane told the Daily Post newspaper of north Wales.

MPC members have been at pains to stress any rate rises would be gradual and minutes from the Bank's January meeting showed the two members who had been voting for an increase since July had changed their minds.

The Bank is due to publish its quarterly Inflation Report on Feb. 11 and most of the economists polled by Reuters - 32 of 40 - said inflation projections would be revised down.

They were less certain about what would happen to the growth outlook. Twelve said growth would be revised down and 10 saw an upward revision. Eighteen forecast no change.

As a group, the economists were also unsure whether the biggest risk to forecasts was from inflation remaining lower for longer or it rebounding more sharply. The split was almost 50-50.