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Pressure builds on BoE to hike rates

Wednesday, July 30 15:56:59

It could be as soon as next week that the first member of the Bank of England's Monetary Policy Committee votes to increase interest rates but it will be early 2015 before a majority agrees, a Reuters poll found today.

The first hike from the record low 0.5 percent Bank Rate, in place since early 2009, will probably come in February, the poll suggested. But even then it will only rise 25 basis points and it will be several years, if ever, to reach pre-crisis levels of over 5 percent.

Bank of England Governor Mark Carney has repeatedly stressed any moves would be gradual. The poll of 55 economists taken this week reflects that, suggesting Bank Rate will end 2015 at 1.25 percent, 2016 at 2.25 percent and 2017 at 2.75 percent.

"No-one doubts that the tightening process will be a slow haul over the coming years," said Peter Dixon at Commerzbank.

But the six months between expectations for the first vote for a hike and when the Bank actually follows through with a policy change is long by historical standards.

The last time the MPC was considering raising rates was in 2006. In May of that year, one MPC member voted for a hike and it took just three months before a majority did the same.

What may be key in any decision is pay.

Workers' pay has started to pick up, but not as fast as inflation. If that wage growth does not accelerate as expected the Bank will hold off on raising rates, almost two thirds of the economists polled said.

"Carney said last week that it would be difficult to raise rates while real wages were falling," said Stephen Lewis, chief economist at ADM Investor Services International, who expects the first hike to come in June.

Economists in the poll gave a median 40 percent chance Bank Rate would rise this year, the same as in a poll taken ahead of the July meeting. Money markets are currently pricing in a 25 basis point rise in UK rates by December.

None of the 55 economists polled expect any move when the MPC meets on August 7 although 18 have a move pencilled in before the end of the year compared to 21 of 63 in a July 3 poll and just four of 52 in a poll ahead of June's meeting.

Britain's economy is now bigger than it was before the financial crisis struck six years ago after strong growth in the second quarter, although it reached the milestone years after other major economies.

Gross domestic product expanded 0.8 percent in the April-June period, the same strong pace as in the first three months of the year, and a Reuters poll earlier this month predicted only a slight slowdown in growth.

Earlier this week the International Monetary Fund backed the central bank's policy of keeping rates low but warned that while inflationary pressures were weak interest rates might need to go up quickly if inflation took off.

While markets are focussing on when the BoE will tighten policy, in euro zone, it is still all about stimulus. (Reuters)

For more visit: www.businessworld.ie