LONDON Britain's fitful economic recovery is likely to force Bank of England policymakers to look beyond mounting inflation and keep interest rates on hold deep into this year, a Reuters poll showed on Tuesday.
Inflation hit an eight-month high of 3.7 percent in December, well above the BoE's 2 percent target and prompting two of its nine Monetary Policy Committee (MPC) members to vote for a rate hike in January.
Still, median forecasts from 70 economists polled by Reuters showed the Bank would keep rates on hold at a record low of 0.5 percent until the final quarter of the year, when they see a hike to 0.75 percent -- unchanged from a poll two weeks ago.
Citing preliminary data that suggested Britain's economy unexpectedly shrank 0.5 percent in the last quarter of 2010, analysts said the patchiness of the recovery would probably suppress urges among most policymakers to hike sooner.
They also pointed to an absence so far of second-round inflation effects, a potentially vicious cycle of wages and other prices growing in response to higher inflation expectations.
"It would take clear signs of a rise in domestically generated inflation pressure for rates to rise before Q4 this year and we doubt very much that this evidence will be forthcoming," said Philip Shaw, chief economist at Investec.
Twenty-one respondents out of 67 thought the BoE would hike rates before the fourth quarter, roughly in line with the UK economy poll of two weeks ago which had 22 out 63 saying so.
Overall, respondents gave a median 75 percent probability of a hike before the end of 2011, although no-one thought it would come at the Bank's meeting on February 10.
Financial markets priced in a May rate hike during the first half of January as inflation pressure mounted, but the shock GDP data prompted a swift reassessment for a rise later in the year.
Given the surge in inflation, only four out of 51 economists who answered an extra question said the Bank will eventually expand its 200 billion pound quantitative easing programme (QE).
That represents a marked change from only three months ago, when 25 out of 47 expected QE to be resumed.
The minutes from the BoE's January rate-setting meeting showed only MPC member Adam Posen voted for 50 billion pound expansion to QE, and there were hints that he might be preparing to ditch that view.
Economists will be eyeing the services PMI data on Thursday, which accurately predicted a shock decline in Britain's service sector-dominated economy in December, for early signs of how the economy is faring in 2011.
The manufacturing sector expanded at a record pace in January, PMI data showed on Tuesday, although it only accounts for around 13 percent of the economy and its strong performance in the fourth quarter failed to offset the shock contraction.
"The stream of weak output data is likely to continue through 2011, stacking the odds against a rate hike," said Stephen Lewis, chief economist at Monument Securities.
"The MPC majority is likely to be content to retain an ultra-accommodative stance as long as wage settlements are well contained."
(Polling by Bangalore Polling Unit; Analysis by Namrata Anchan and Ruby Cherian; Editing by Catherine Evans)