First BoE hike pushed back to Q4, but close call: Reuters poll

[LONDON] The Bank of England will still raise interest rates from a record low this year but whether it does so in the third or fourth quarter may be too close to call, according to a Reuters poll.

Twenty of the 39 economists quizzed this week do not expect any change before October whereas the other 19 predicted an increase. A Dec 10 poll found around two thirds of economists expected the first rise to come in the third quarter.

With inflation at a 14-year low the BoE is under no pressure to hike Bank Rate from the rock-bottom 0.5 per cent it has sat at for nearly six years, although expectations for the fourth quarter were more solid.

Thirty-seven of 43 economists were expecting a rise before the year is out but even then the median was for a mere 25 basis point hike. Still, even that is ahead of financial markets who are betting the first rise will not come until next year.

"With inflation heading close to, and possibly below, zero per cent, the central bank faces absolutely no pressure to raise interest rates," said Rob Wood, chief UK economist at Berenberg. "They can safely sit back and wait to see if any of the theoretical risks of low inflation turn into practical problems. In our opinion, those theoretical risks are overblown."

The consensus for a first BoE rate hike has moved considerably in the last few months. As recently as October it was for a hike in the current quarter. Then that was pushed back to Q2 in November and it has now moved even further ahead.

Brent crude prices tumbled to a near six-year low on Tuesday and inflation forecasts in the latest poll were slashed. It will average just 1.0 per cent this year, down from the 1.3 per cent predicted in December's poll and half the Bank's target.

The median forecast for the current and next quarter tumbled to 0.6 and 0.7 per cent from December's respective 1.0 and 1.1 per cent predictions.

Vicky Redwood, chief UK economist at Capital Economics, said she had pencilled in an inflation rate of -0.1 or -0.2 per cent in February and March but added it would average 0.1 per cent this quarter.

"We now think that a brief period of mild deflation in the UK is more likely than not. However, this should be the 'good'type of deflation which will give a boost to the economy."

Indeed, Britain's economic growth will far outpace the euro zone which is facing the threat of outright deflation. It will average 2.6 per cent this year and 2.4 per cent next compared to 1.1 and 1.5 per cent in the 19-nation bloc.

REUTERS