First BoE rate hike to 0.75% still expected in Q1 2016: Reuters poll

[LONDON] British interest rates will rise early next year as the economy chugs along and inflation creeps back towards the Bank of England's target, according to a Reuters poll that found economists' forecasts little changed.

Bank Rate has sat at a record low of 0.5 per cent for over six years and the median in the poll of around 40 economists, taken in the past week, again said an initial hike of 25 basis points would not come until the first quarter of next year.

But as a whole the group's conviction on that timing is wavering, with a 55 per cent likelihood of a hike before April, down from 60 per cent in a May poll. The latest poll found a 70 per cent chance of a hike by the end of June.

"Headline inflation will be less of an obstruction by then. The best probability is February but I wouldn't rule it out being a bit earlier and equally it could be a bit later if the growth data disappoint," said Alan Clarke at Scotiabank.

That median expectation is earlier than markets are thinking. They have not fully priced in a hike until the second quarter of 2016 and the BoE last month cautiously backed those expectations for a later move.

What markets and economists do agree on is that when the BoE does start tightening policy it will do so only gradually. Bank Rate will be just 1.25 per cent at the end of next year and a still historically low 2.00 per cent by end-2017.

The BoE was once widely expected to be the first major central bank to begin tightening policy but the US Federal Reserve is currently on track for a September rate hike as the world's largest economy picks up.

Still, the time for Bank Rate to start rising is getting closer and data over the next few months will help determine exactly when that will be, Ian McCafferty, a member of the BoE's Monetary Policy Committee said on Friday.

Slowing global growth and tumbling crude oil prices which sent inflation around the world into free-fall gave central banks scant reason to tighten policy.

But Britain's economy is expected to grow a relatively healthy 0.6-0.7 per cent per quarter for the rest of this year, albeit sometimes slightly weaker than predicted last month, and inflation will rise towards the BoE's 2 per cent target in the coming 12 months.

Growth could be hit by the threat of Britain leaving the European Union, economists said. Nearly half of them pegged that as the biggest risk to forecasts, with the second most popular option being low productivity.

The Conservative Party, which won a surprise majority in May's national election, has promised to hold a referendum on the country's EU membership. To remove doubt, around two thirds of respondents said they should hold the ballot as soon as possible.

"Major businesses' investment decisions will now be on hold until at least after the UK's position in the EU is clear. The sooner the referendum is held the better," said Azad Zangana at Schroders.

REUTERS