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BOE August rate increase in question as UK economy falters

London

ECONOMISTS are increasingly questioning whether the Bank of England (BOE) will raise interest rates in the coming months.

Less than 55 per cent of analysts surveyed by Bloomberg expect a hike in August, down from 60 per cent in a similar poll in May.

BOE officials are gathering this week for their June policy meeting, the minutes of which have the potential to lay the groundwork for an increase later in the summer to 0.75 per cent from 0.5 per cent.

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Market voices on:

"The minutes are likely to allude to intensifying political risks associated with Brexit negotiations," Goldman Sachs economist Adrian Paul said in a note published on Monday. "We expect the committee to remain equivocal over the precise timing of incremental tightening."

The uncertainty created by negotiations for the UK to leave the European Union is muddying the path away from extraordinary stimulus for the BOE.

Since their last meeting in May, global growth has moderated and the anticipated British rebound from a snow-blighted first quarter has been slow to assert itself.

Economists' less-than-fulsome endorsement of an August hike is also reflected in markets, where investors assign about a 50 per cent chance to such a move. It also contrasts with their exuberance earlier this year, when almost three-quarters were expecting a hike in May less than a month before that decision.

Those bets were derailed by a spate of worse-than-expected data and the public doubts of BOE governor Mark Carney.

Since then, policymakers have expressed optimism that the economy is bouncing back from a near-stagnation at the start of the year. They also say that limited and gradual rate hikes are still required over the next few years to keep inflation in check, partly because the economy's "speed limit" has fallen.

Dan Hanson at Bloomberg Economics said: "Our estimates suggest the neutral rate of interest is currently a touch above the Bank of England's policy rate. But even that modest stimulus may be too much considering the economy is almost running at full capacity." 

Though data last week painted a mixed picture, economists expect growth to rebound to 0.4 per cent in this quarter, in line with BOE officials, and see the measure staying at that level till the end of 2019. BLOOMBERG