First BoE hike pushed back to fourth-quarter, but close call: poll

[January 15, 2015] By Jonathan Cable

LONDON (Reuters) - 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 percent 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 percent, 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 percent this year, down from the 1.3 percent 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 percent from December's respective 1.0 and 1.1 percent predictions.

Vicky Redwood, chief UK economist at Capital Economics, said she had penciled in an inflation rate of -0.1 or -0.2 percent in February and March but added it would average 0.1 percent 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 percent this year and 2.4 percent next compared to 1.1 and 1.5 percent in the 19-nation bloc.

(For other stories from the poll see)

(Polling by Sarbani Haldar and Hari Kishan; Editing by Ross Finley and Angus MacSwan)

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