What: Bank of England's February monetary policy decision
When: Thursday Feb 10 at 1200 GMT
BoE seen keeping rates at 0.5 pct; 1 in 5 chance of rise to
By Christina Fincher
LONDON, Feb 7 The Bank of England will have to
decide this week whether its first priority is to tackle soaring
inflation or to support Britain's fitful economic recovery.
Such opposing risks put Britain's central bank in an
unenviable dilemma and mean Thursday's decision is the first
since rates were cut to record lows in March 2009 when investors
have felt in any real doubt about the outcome on rates.
News Britain's economy contracted at the end of 2010 has
encouraged analysts to stick with their view that the BoE will
keep interest rates on hold until much later in the year.
[ID:nLDE7100Q5] A Reuters poll last week showed only 21 out of
67 analysts thought rates would go up before the fourth quarter.
However, with pipeline price pressures building and the
BoE's credibility under threat, money markets ICAPSONIA are
pricing in around a 20 percent chance of a quarter point rise to
0.75 percent this week, and a 100 percent chance of such a move
The contrast between analysts' views and Sterling Overnight
Interbank Average Rates may partly reflect overshooting by the
market. After many months when investors saw little need to
hedge against a rise in interest rates, they have been piling
into the market to do so, distorting prices. [ID:nLDE712198]
UK interest rates have stood at 0.5 percent since March
2009, when the BoE slammed monetary easing onto full throttle to
protect the economy from the ravages of recession and deflation.
Fast-forward two years and Britain's problem is with prices
rising rather than falling. Inflation hit an eight-month high of
3.7 percent in December, almost twice the central bank's target,
and looks set to rise even higher in the coming months.
"We expect the Monetary Policy Committee will leave rates on
hold at the upcoming meeting but it may be a much closer call
than many expect," said Michael Saunders, UK economist at Citi.
"We expect that inflation will stay above target for an
extended period, not just this year but probably 2012 and 2013
CREDIBILITY AT STAKE
A rise in interest rates might reassure investors that the
central bank was serious about bringing inflation back to target
-- something they have started to doubt after three years of
BoE policymakers will have updated inflation and growth
forecasts this week that are likely to show consumer price
inflation approaching 5 percent in the coming months.
The doves on the BoE's monetary policy committee might take
comfort from the fact that domestically-generated inflation
remains benign. Although public inflation expectations have
risen, wage inflation remains subdued by historical standards,
running at a year-on-year rate of 2.1 percent in the three
months to November.
The hawks, led by Andrew Sentance and Martin Weale -- two
members who voted for a rate rise in January -- will argue that
pre-emptive action is needed: by the time second-round inflation
effects are felt, it is too late to put the inflation genie back
in the bottle.
In an interview last week, BoE Deputy Governor Charles Bean
said that if oil prices surged and inflation became embedded,
then interest rates would have to rise even if growth was weak.
With the outlook so murky, BoE policymakers might decide to
keep policy unchanged this month but send a message, spelt out
in next week's Inflation Report, that rate rises might not be
far away. That would avert a shock move this month and pave the
way for a rise in March or April.
"There is now major uncertainty over interest rate prospects
in both the very near term and further out," said Howard Archer
at IHS Global Insight.
"Further increases in headline inflation over the coming
months and rising inflation expectations could well force the
Bank of England's hand sooner rather than later."