Bank of England set to raise rates for
first time since 2007
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[November 02, 2017]
By David Milliken
LONDON (Reuters) - The Bank of England
looks set to raise interest rates for the first time in more than 10
years on Thursday, despite economic growth appearing weaker than before
any other increase in borrowing costs in the past two decades.
A firm majority of economists polled by Reuters expect the BoE to raise
base rates to the 0.5 percent they stood at from March 2009 until August
last year, when they were halved to 0.25 percent after Britons voted to
leave the European Union.
But most think this would be a mistake: Britain's annual growth is
running at its weakest in four years and Brexit talks are casting a
shadow over the economy.
But with inflation hitting a five-year high of 3.0 percent in September
and unemployment at a 42-year low, the central bank is worried the
economy could overheat.
"The time for beginning to edge up interest rates oh-so-cautiously from
a quarter percent to a half percent is pretty nigh," former BoE deputy
governor Rachel Lomax said at a Fathom Consulting event hosted by
Thomson Reuters this week.
A BoE rate hike would follow the pattern set by the U.S. Federal Reserve
and to an extent by the European Central Bank, which has said it will
start to scale back its stimulus plan.
Those economies are motoring ahead, however, and Britain's planned
departure from the EU in March 2019 makes its future harder to predict.
Most economists polled by Reuters said the BoE should wait for clearer
evidence that higher wages will keep inflation above its 2 percent
target once the effect of last year's post-Brexit-vote fall in the pound
"It would probably be more sensible to wait," said Seamus Mac Gorain, a
former BoE economist who is now a fund manager at JP Morgan Asset
Management, which controls $476 billion of fixed income assets such as
Raising rates to 0.5 percent will not derail the economy. But further
increases might be damaging, he said.
"If it ends up being a policy error, it will only be because they make a
larger change in rates."
Underlining that risk, a survey on Thursday showed optimism in British
construction firms - a bellwether of the wider economy - now stands at
it lowest level since late 2012, around the last time Britain flirted
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The Bank of England is seen in the City of London, Britain November
1, 2017. REUTERS/Toby Melville
Governor Mark Carney will hold a news conference at 1230 GMT, half
an hour after the BoE publishes its decision.
Markets currently price in a more than 90 percent chance of a rate
hike on Thursday, based on overnight index swaps.
After that, the probability of another rise in February currently
stands at around 50 percent and is fully priced in by the middle of
next year, said RBC fixed income strategist Vatsala Datta.
Economists are much more skeptical, and most do not expect rates to
rise at all next year.
The BoE said in September that most of its nine policymakers
expected to back a rate rise "over the coming months". The number
who actually do so this month will be key for market expectations of
a future rise.
A Reuters poll suggested a 6-3 vote in favor of a rate rise.
If the BoE forecasts that inflation in two to three years will still
exceed its 2 percent target, investors may take that as a hint from
the central bank that rates will need to rise faster than markets
Carney is likely to stick to long-standing BoE language that rate
rises will be "gradual" and "limited" and not the start of a return
to pre-crisis levels of rates of around 5 percent.
The British people, 8 million of whom have never known a rate rise
in their adult lives, will be his main audience.
"The market has largely priced in a rise, but it will probably be
more of a surprise to the general public," Mac Gorain said.
(Additional reporting by Andy Bruce; editing by John Stonestreet and
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