Bank of England to hold rates next month; staying in EU best for UK trade: economists

[October 25, 2016]  By Jonathan Cable

LONDON (Reuters) - The Bank of England is not now expected to ease policy until early 2017, according to economists in a Reuters poll who almost unanimously said staying in the European Union would be the best for the UK's long-term trading prospects.

Britain voted to leave the EU on June 23 and while the economy has so far fared better than expected, sterling <GBP=> has collapsed to levels not seen in over three decades.

That is likely to push the Bank to ramp up its inflation forecasts when it publishes its quarterly review on Nov. 3 although the BoE typically views currency-driven overshoots in inflation as temporary and tries to look beyond them.

Around three quarters of the 60 economists polled by Reuters in the past few days, most of whom expect BoE Governor Mark Carney to stay in the job after mid-2018, said Bank Rate would be left at its current record low of 0.25 percent next month and at the December policy review.

"We expect the Bank of England to revise up both growth and inflation in this set of forecasts, undermining the case for further easing," Liz Martins, at HSBC, said.

In an Oct. 13 poll the median had predicted a 15 basis point cut before year-end but the latest Reuters poll said that cut now wouldn't come until early next year. [ECILT/GB]

A reduction to 0.1 percent is probably the lowest the Bank would go, according to most economists in the poll, although a few said it could trim Bank Rate to 0.05 percent.

"Given Mark Carney's repeated assurance that he does not want to see UK rates follow other central banks into negative territory, the cut to 'just above the lower bound' (range) represents the last drop of fuel in the tank, at least for interest rates," Martins said.

None of the economists polled expected any change next month to the quantitative easing program the Bank restarted less than two months after the surprise referendum result.

More than 90 percent of respondents said there would be no top-up before the end of 2018 - the forecast horizon in the poll - to the 435 billion pounds ($532 billion) of Gilts or the 10 billion pounds of corporate bonds the Bank has said it would purchase.

Carney, who was governor of the Bank of Canada before joining the BoE, is due to announce in the coming weeks whether he plans to extend his five-year stay at the Bank as governor, which is due to end in mid-2018, by a further three years.

Prime Minister Theresa May issued the government's sharpest criticism of the BoE since the financial crisis earlier this month and many supporters of Britain's exit from the EU strongly objected to Carney's warnings of the economic risks of Brexit in the run-up to the referendum.

People travel on a bus as it passes the Bank of England in the City of London, in London, Britain September 28, 2016. REUTERS/Toby Melville/File Photo

May highlighted the "bad side-effects" for savers of the BoE's near-zero rates and said a change had to come. Carney hit back at the criticism, saying he would not "take instruction" from politicians on how to do his job.

A firm majority, 28 of 36 economists who answered an additional question said they expected Carney to stay on after mid-2018.

"If he were to decide not to stay until 2021 recent events would raise suspicions that the role of governor is subject to a greater degree of politicization than hitherto believed," said Peter Dixon at Commerzbank.

INS AND OUTS

Britain's economy probably grew 0.3 percent last quarter, official figures are expected to show on Thursday. While better than the mild recession forecast before the referendum based on a vote to leave the EU, it is still less than half the second quarter's growth rate.

Next year growth is expected to be just 0.8 percent.

Negotiations on Britain's EU divorce agreement have yet to begin and many suspect May is leaning towards a "hard Brexit" - giving up trying to remain in the EU's single market in order to impose controls on immigration.

Such a move could hinder trade, particularly in services, and hurt foreign investment. All but one of the 43 economists who answered an additional question said the best for the UK's long-term trading relationship with the EU would be to remain a member, something May has ruled out.
 

The respondent, just over half of whom are based in Britain, were also almost united in saying the worst outcome would be a standalone World Trade Organisation membership. The economists were split as to whether membership of the European Economic Area or a negotiated bilateral agreement was the second or third best option of the four.

(Polling by Shrutee Sarkar and Sarmista Sen; Editing by Ross Finley/Jeremy Gaunt)

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