BoE to tread cautious path in face of budget cuts – poll

Severe UK budget cuts and the possibility of slower growth ahead will force the Bank of England to wait until the second quarter of 2011 to raise interest rates, according to a Reuters poll of 61 economists.
While official data last week showed the British economy grew at the fastest rate in four years in the second quarter, there was little expectation in the Reuters survey this would encourage the Monetary Policy Committee to become more hawkish.
In fact, respondents' median forecasts for rate hikes were more moderate compared to a month ago. Few expected the bank to indulge in more growth-boosting quantitative easing.
Economists saw the bank rate rising 25 basis points from its record low of 0.5% in the second quarter of next year, before rising to 1.5% by the end of 2011. Forecasters in last month's poll saw it at 1.75% by then.
"On the surface, all the signs might suggest that the BoE would be more likely than not to raise rates this year," said Peter Dixon of Commerzbank.
"But we continue to believe that the Q2 growth rate was an outlier and with uncertainty surrounding the outlook in the wake of fiscal tightening, we believe the BoE is on hold well into 2011."
There is now just a 20% probability of a rate hike before the end of this year, according to median forecasts, compared with a 28% chance seen a month ago.
News last Friday that Britain's economy grew 1.1% in the second quarter shocked analysts, who had expected far more modest growth of 0.6%.
Sterling hit a five-month high against the dollar on Thursday, underpinned by the strong data, and upbeat corporate results have also boosted the FTSE 100 index of Britain's top companies.
But economists said the implications on growth from fiscal tightening announced by British finance minister George Osborne in June — involving some government department cuts of 25% — are still unclear.
There are still worrying signs of waning demand. British mortgage approvals fell more than expected in June and lending was weaker than forecast, according to Bank of England figures on Thursday.
This weakness in the economy would likely concern the MPC more than high inflation right now, poll respondents said, even though consumer price growth has persistently overshot the 2% target this year.
On Wednesday, after most of the polling was complete, BoE Governor Mervyn King said in parliamentary testimony that recent strong data did not mean MPC members should be "applying the brakes", and pointed out that the bank had room to use policy in either direction.
"On balance, we suspect that most MPC members will be prepared to hold off from raising interest rates for some time to come given serious downside risks to the longer-term growth outlook," said Howard Archer of IHS Global Insight.
Economists polled by Reuters two weeks ago expect the British economy to grow 1.2% this year — in line with the official forecast — and 2.0% in 2011.