Bank to hold rates until 2011, remains credible - Reuters poll

LONDON (Reuters) - The Bank of England will hold interest rates at a record low until next year to support a fragile recovery and has not lost credibility from inflation running at almost double its target, a Reuters poll showed.

The survey of 61 economists, taken over the past week, gave just a 30 percent chance of a rate hike by year-end, well down from the median 55 percent forecast in last month's poll.

Only 20 analysts predicted a rate hike this year compared with 35 one month ago.

The economists were unanimous that the Monetary Policy Committee would leave Bank Rate at a record low of 0.5 percent when it meets on Thursday, June 10.

Median forecasts from the poll suggest rates would rise in the first quarter of next year to 0.75 percent, then to 1.0 percent by end-June and finish the year at 2.0 percent.

That delay in forecasts for a rate rise to early next year underscores how the European debt crisis and accompanying austerity measures have shaken expectations of when the Bank -- as well as other central banks -- will begin normalising policy.

"The UK is faced with heavy fiscal consolidation measures to cut the public deficit," said Danielle Haralambous at 4Cast. "Expansionary monetary policy is likely to be maintained in order to offset this contractionary effect."

Prime Minister David Cameron's coalition government has outlined plans to trim an initial 6.2 billion pounds from public spending this year and has made tackling the budget deficit, running at close to 11 percent of GDP, its top priority.

The government, formed after an inconclusive election on May 6, is trying to secure the country's recovery from an 18-month recession that ended in late 2009, later than other developed nations.

But across the English Channel, things are looking similarly shaky. A separate Reuters poll on Wednesday showed the European Central Bank will hold rates at their record low of 1.0 percent until next April at least, later than in the previous survey.

The ECB is struggling to maintain the 16-nation bloc's recovery in the face of investor insecurity churned up by the region's debt crisis.

CREDIBLE COMMITTEE

The Bank of England has been faced with the double-whammy of a sluggish recovery from the worst recession since the second world war while inflation has soared above its 2 percent target. Consumer prices rose 3.7 percent in April on a year ago.

Bank Governor Mervyn King said temporary factors were largely to blame and that inflation was likely to ease back to Britain's official 2 percent target within a year. But he said the pace and extent of that expected fall remain "highly uncertain".

But economists did not feel the MPC had lost credibility in letting inflation run high. Twenty-eight of 41 disagreed or strongly disagreed with the statement "With inflation double the BoE's target and much higher than its main trading partners, do you think the BoE has lost credibility."

Twelve agreed and one analyst strongly agreed.

The Organisation for Economic Co-operation and Development (OECD) said last week policymakers will have to balance the fragile state of the economy with the need to maintain credibility when they decide on the pace of cuts.

"CPI inflation is on a downward trend -- indeed VAT is adding around 1.5 percentage points to the inflation rate -- and the OECD's suggestion that the BoE's credibility may be at stake is ludicrous," said Peter Dixon at Commerzbank.

The central bank forecasts that CPI should be back on target by the end of the year or early 2011. Economists in a Reuters poll a few weeks ago said it would be the first quarter of next year before inflation drops below target.

(Polling by Bangalore Polling Unit; Editing by Toby Chopra)