May 7, 2014 / 11:01 PM / 4 years ago

Bank of England to stick with low rates even as recovery builds

* BoE expected to keep rates at 0.5 percent

* Sterling at near five-year high vs dollar

* Policymakers to discuss new forecasts

By William Schomberg

LONDON, May 8 (Reuters) - The Bank of England looks set to keep interest rates at a record low on Thursday, despite signs that the recovery is picking up more speed and that house prices are surging.

Britain is likely to grow faster than any other Group of Seven economy this year and expectations are building that the BoE might raise borrowing costs sooner than it has signalled.

The pound hit its highest level against the dollar in nearly five years this week.

“I am starting to get twitchy,” Scotiabank economist Alan Clarke said. He has predicted a first rate hike in February next year, but that was before private-sector surveys showed strong growth and double-digit house price increases in April.

“If you get wages picking up, I think there is a good chance you get a hike before Christmas,” Clarke said.

Bets in markets are largely on a first increase in the first quarter of 2015. The BoE hinted in February that the second quarter of next year was the most likely timeframe.

Despite the speed of its turnaround, Britain’s economy remains a touch below its size before the 2008-09 recession, according to the latest data. The BoE thinks the recovery can continue without causing inflation pressure.

The two-day meeting of the Monetary Policy Committee is due to end with a statement at 1100 GMT on Thursday.

It is the first meeting since unemployment fell below the 7 percent level set by the MPC last August as a threshold for considering a rate hike. Mark Carney, who had just started as BoE governor, pushed for the policy to counter speculation that rates might go up quickly when the recovery kicked in.

But unemployment tumbled towards 7 percent far faster than the Bank had predicted, forcing the MPC to announce a new phase of its so-called forward guidance policy in February, linking its thinking on rates to spare capacity in the economy.


The MPC is due to update its quarterly forecasts at this week’s meeting but will not publish them until next Wednesday. Investors will be watching for the Bank’s fresh assessment of how quickly slack in the economy is being run down.

So far, the nine MPC members have remained united on the need to leave interest rates at 0.5 percent, helped by a fall in British inflation to its lowest level in more than four years.

Some senior policymakers have begun to express concern at how quickly house prices are rising. A survey last week showed they jumped by nearly 11 percent in annual terms in April, though figures from the Royal Institution of Chartered Surveyors on Thursday pointed to some signs that price rises were slowing.

But the BoE is stressing that it can deploy measures to control mortgage lending as a first line of defence, rather than raise interest rates.

Some economists, such as Rob Wood at Berenberg bank, think a first MPC split could appear by late summer.

“Record low interest rates are no longer necessary,” Wood said in a note to clients on Tuesday, after a survey showed that growth in April in Britain’s dominant services sector was its fastest in 2014 so far.

“The economy is growing rapidly and, if anything, is picking up pace,” Wood said.

None of 61 economists polled by Reuters last week expected the Bank to change its benchmark interest rate on Thursday.

The BoE has said it would keep the stock of asset purchases from its quantitative easing programme at 375 billion pounds ($628 billion) and would start to run it down only after it starts raising rates. (Editing by Andrew Roche)

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