Bank done with QE but no rate hike until year-end - Reuters poll

LONDON Thu Jan 6, 2011 5:21pm GMT

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LONDON (Reuters) - The Bank of England has likely put its asset purchase to bed for good thanks to high inflation but it will probably wait until at last October before raising interest rates from record lows, a Reuters poll found.

None of the 62 participants in the poll, taken this week, predicted the Bank would hike Bank Rate from a record low of 0.5 percent or announce any increase to its stalled quantitative easing programme when it meets on Jan 13.

Only eight of 53 participants said the central bank would ever go beyond the 200 billion pounds it has already spent buying government bonds to protect the Britain's economic recovery. That is down from a third in last month's poll.

"We were looking for an extension possibly early this year but the inflation risk arguments have now overshadowed that," said Adam Chester at Lloyds Banking Group.

Inflation rose to a six-month high in November of 3.3 percent, well above the Bank's 2.0 percent target, and may go higher following the government's increase in sales tax at the start of the year.

"The elevated inflation numbers we are expecting over the next few months will likely preclude the MPC doing any more QE -- even if as we expect growth slows in the early part of 2011," Chester said.

Economists see inflation averaging 3.4 percent over the next three months according to a separate Reuters poll.

But that threat of inflation won't trigger a rate increase any time soon.

Median forecasts from the poll show the bank will not raise rates to 0.75 percent until the final three months of the year. Rates are set to rise to 1.0 percent in the first quarter of 2012 and then to 1.5 percent in the second.

Just seven of 60 economists see a rate rise before June giving a 30 percent median probability of a hike by then. Nine of 67 saw a rise before June in December's poll, giving it a 25 percent chance.

"The MPC is unlikely to be persuaded of the case for a move until there is clearer evidence that the economy is able to withstand the fiscal tightening -- mid year 2011 will be too soon to do so," said Simon Rubinsohn at RICS.

The Monetary Policy Committee was split at its December meeting with one member calling for more QE, seven voting to maintain the status quo and one calling for a 25 basis point rate hike, minutes showed.

Hawkish Bank policymaker Andrew Sentance said late last month that the central bank should raise interest rates sooner rather than later to contain price rises.

The Office for National Statistics revised down third quarter growth to 0.7 percent from 0.8 percent and said growth in the first two quarters of 2010 was also slightly weaker than previously reported.

A Reuters poll taken last month suggests growth will slow further, averaging between 0.3 and 0.5 percent per quarter through this year.

The coalition, which took office last May, plans to cut the budgets of most government departments by just under a fifth over the next four years and has increased a sales tax to bolster their finances but this will put a dampener on expansion.

(Polling by Bangalore Polling Unit)

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