UK expected to raise rates as inflation remains below target

Doubts over Britain’s future in the EU could delay the central bank’s expected policy tightening cycle

The Bank of England’s first rate increase in more than eight years is likely to come in the second quarter of 2016, as previously expected, bolstered by the Federal Reserve’s decision to raise US rates last month, a Reuters poll found.

The BoE is expected to raise its benchmark bank rate 25 basis points to 0.75 per cent by the end of June, according to the consensus forecast in a survey of 48 economists. The central bank has kept the rate at a record low of 0.50 per cent since early 2009.

The BoE is expected to raise rates once more after that initial move, taking rates to 1.00 per cent by the end of this year, the survey also showed. Those medians are unchanged from Reuters polls conducted in November and December. “With the first Fed rate hike having gone smoothly, this will give the BoE hope that any UK tightening will also go well,” said Peter Dixon, an economist at Commerzbank.

When surveyed last month before the Fed raised rates for the first time in nearly a decade, half of 36 economists said if the US central bank did not move as expected, they would push their BoE hike forecasts further into the future.

Over a year ago, the BoE was considered the first major central bank likely to raise rates from zero, before the Fed.

But Britain’s slowing economic growth, record-low inflation - which was stuck between -0.1 and 0.3 per cent all through 2015 - along with a gloomier global economic outlook prompted a change in that thinking.

Some economists said the BoE may raise rates later and more slowly than predicted since inflation is nowhere close to its target and wage growth hasn’t picked up to precrisis levels.

Market signals

Financial markets are not fully pricing in the first rate increase until the turn of 2017.

“There is an increasing divergence between what is happening in the real and financial sectors of the economy, with the former showing decent growth and low inflation but the latter having enjoyed boom conditions in recent years (especially housing),” said Commerzbank’s Dixon.