LONDON (Reuters) - The Bank of England on Thursday might seek to challenge the view in financial markets that it is still a very long way from raising interest rates, nearly seven years after it cut them to a record low.
The central bank surprised investors last month when it released a barrage of economic forecasts that suggested it might leave rates unchanged until early 2017, pushing down the value of sterling.
But a top BoE official later warned investors against reading too much into the Bank’s projections when it came to assessing the outlook for rates.
Some economists expect a similar signal when the Bank announces the outcome of its monthly policy meeting at 1200 GMT.
“A crucial question now is: Does the Monetary Policy Committee really want to sound anything like as dovish as markets?” Investec economist Chris Hare said.
All 52 economists in a Reuters poll believed the Bank will announce on Thursday that it is keeping its benchmark lending rate at 0.5 percent, where it has sat since early 2009 when Britain was in the grip of the financial crisis.
Almost all the economists in the poll thought the MPC would once again vote 8-1 against raising rates.
BoE Governor Mark Carney and his colleagues have said they want to see more of a pick-up in British wages before they start to think about moving more quickly towards a rate hike.
Possibly adding to their caution, a recent further fall in global oil prices could keep inflation below zero for longer.
Carney has previously sent messages that a rate hike might be on the way, only to be knocked off course by surprises such as the plunge in oil prices and this year’s surge in concern about a slowdown in China and other emerging markets
FOLLOW THE FED?
Yet there are other reasons why the Bank might feel that the time is approaching for a rate hike.
The Federal Reserve is widely expected to raise U.S. interest rates for the first time since 2007 next week, giving the Bank a chance to see how the global economy and markets react before it has to make up its mind on when to follow suit.
At home, a pick-up in Britain’s dominant services industry in November pointed to a recovery in overall economic growth in the final months of 2015 after a dip in the third quarter, and could start to heat up inflation before long.
“We think that there is the case for a baby step in the hawkish direction on the back of firmer domestic data, less bad external news and the likelihood that the Fed will hike imminently,” Scotiabank economist Alan Clarke said.
Economists at Morgan Stanley say British inflation could rise to 1 percent by March, much quicker than the BoE has forecast. That would back the case for a rate hike in May although it would be the start of a very slow rise.
“It will be enough to get the Bank hiking but it will also be slow enough that the Bank could be knocked off course,” Jacob Nell, an economist with Morgan Stanley, said.
Another reason for the Bank to be cautious is Britain’s planned referendum on its membership of the European Union.
Economists polled by Reuters said uncertainty over the vote’s result, which could hurt business investment and growth, was the biggest risk to Britain’s economy in 2016.
Prime Minister David Cameron has said he plans to hold the referendum before the end of 2017.
Editing by Catherine Evans
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