Bank to hold fire until Q3 on growth fears - Reuters poll

A clock displays the time just after midday, opposite the Bank of England in the City of London March 10, 2011.

LONDON (Reuters) - The Bank of England will hold fire on raising interest rates until July at least as a tepid economic recovery fails to convince a majority on the Monetary Policy Committee to act, a Reuters poll showed on Wednesday.

The poll of 62 economists, taken before data showed the British economy grew 0.5 percent in the first three months of the year, gave just a 30 percent chance the bank would act before the middle of the year, down from 45 percent in a poll taken last month.

The drop in probability comes despite March inflation running at double the Bank's two percent target as the government embarks on a tough austerity package to cut a record budget deficit and a slew of weak data.

GDP fell by 0.5 percent at the end of last year so the rise of 0.5 percent in the first quarter -- which was what economists had predicted -- means Britain's economy has stagnated since September.

"It is likely that many MPC members will have reservations about raising rates in the face of economic weakness in view of the fact that we have yet to see the full impact of fiscal tightening on the economy," said Peter Dixon at Commerzbank.

Bank policymaker Martin Weale, who has voted for higher rates since the beginning of the year, told Reuters last week he had been surprised by the lack of a rebound at the start of the year, particularly for the construction sector.

But compared with the nine members of the MPC, three of whom voted to raise the Bank Rate this month, respondents showed a stronger consensus as to when the bank would act.

Just seven of 62 saw a hike in the current quarter compared to 20 of 67 in a poll taken two weeks ago and almost half in a poll taken the week before the April MPC meeting.

Markets are not fully pricing in the first hike until November.

Median forecasts in the latest Reuters poll predict rates will end the year at 1.0 percent and then rise 25 basis points per quarter in 2012, in line with a poll taken two weeks ago.

The European Central Bank was the first of the big four central banks to act when it upped interest rates by 25 basis points from a record low of 1.0 percent this month as it battles its own inflationary problems.

QE WIND-UP

The latest poll found that the Bank will begin raising rates long before it starts unwinding its 200 billion pounds of quantitative easing bond purchases, which were intended to give an additional boost to the economy once the MPC could no longer cut rates.

The median forecast said it would be the second half of next year before the Bank began pulling back QE, in line with last month's poll, but 12 of 31 respondents who answered the extra question said it would be least 2013.

"They won't start unwinding for a while, broad money is still weak," said Michael Saunders at Citi.

Money supply figures stayed frail in February, with aggregate M4 dropping by 0.3 percent on the month and 1.5 percent on the year -- just short of last month's record 1.7 percent annual contraction.

The Bank's preferred gauge of money supply, M4 excluding intermediate other financial corporations, fell 0.5 percent on the month, its biggest monthly drop in a year.

(Polling by Bangalore Polling Unit; Editing by Ruth Pitchford)