May 1, 2014 / 2:43 PM / 6 years ago

UK business investment rebound likely, but rates steady - Reuters poll

LONDON (Reuters) - The Bank of England is probably correct in predicting bumper investment by private firms this year but it still won’t raise interest rates until next April at the earliest, a Reuters poll of economists found on Thursday.

Wads of British Pound Sterling banknotes are stacked in piles at the GSA Austria (Money Service Austria) company's headquarters in Vienna July 22, 2013. REUTERS/Leonhard Foeger

Nearly two-thirds of the 46 forecasters polled this week said they broadly agreed with the central bank’s forecast that the percentage rise in business investment this year would climb to double digits. Just a few months ago only six of 38 economists polled agreed.

“It pretty much already is. It’s already up 8.5 percent year to year, all the business surveys are very positive, and corporate liquidity is the highest for 50 years,” said Michael Saunders at Citi, who had the most aggressive rate hike forecasts.

Prior to the spurt in business investment in the final months of 2013, it contracted for four quarters in a row on an annual basis. There was a brief double-digit surge in early 2012, but it has is not had a sustained expansion since before the financial crisis.

The central bank tied its forward guidance on interest rates to unemployment last year but abandoned that within six months after joblessness fell much faster than anyone expected.

The Monetary Policy Committee said it would instead focus on a wide range of measures, including slack in the economy, surveys and numbers of hours worked, and business investment.

However, the wide range of numbers the MPC is now monitoring has made it harder for market watchers to gauge when the Bank will raise rates although medians from the poll suggest it won’t be until next April at the earliest.

The poll gave a median 30 percent probability of a rate rise this year, unchanged from a month ago, but a more certain 85 percent likelihood of a hike by the end of 2015.

But there are a wide range of views on where rates will be by late next year.

Four of the gilt-edged market makers (GEMMs), or primary dealers in UK gilts, surveyed by Reuters called for Bank Rate at 1.25 percent or higher in the third quarter of 2015. Citi is forecasting it at 2.0 percent.

There are two GEMMs, as well as four other forecasters, who are predicting Bank Rate on hold at 0.5 percent through to the end of September next year, despite a rapidly-reviving economy.

BOOM TIMES AGAIN?

Britain’s economy grew at its fastest pace in more than six years at the start of 2014, expanding 0.8 percent on the quarter. But it is still smaller than at the start of the financial global crisis.

“It is quite clear that the UK economy isn’t losing any momentum. Consequently, we still feel the risks are skewed towards an earlier rate rise,” said James Knightley at ING.

Economists in Reuters polls have been steadily bringing forward when they expect the central bank to act and have also become more aggressive. Only 16 see rates at 0.5 percent in July next year compared to 28 in January.

But with inflation well below the Bank’s 2 percent target, none of the 61 economists polled expect any move from the record low of 0.5 percent when the MPC meets on May 8. Only seven have pencilled in any hike this year.

Indeed, the latest long-term Reuters outlook poll on the UK economy found a median inflation forecast of 2.0 percent in the first and second quarters of next year, averaging only 2.1 percent in the third quarter.

MPC members have frequently said any tightening of policy will be gradual. However, MPC member Ian McCafferty has warned the bank must not start raising interest rates too late if it is to follow through on that guidance.

Polling by Siddharth Iyer and Hari Kishan; Editing by Hugh Lawson

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