April 29, 2016 / 11:51 AM / 3 years ago

Bank of England likely to keep rates unchanged until early 2017: Reuters poll

LONDON (Reuters) - Britain’s key interest rate is likely to stay at a record low of 0.5 percent until at least January as the Bank of England waits for growth and inflation to pick up, a Reuters poll forecast on Friday.

City workers walk past the Bank of England in the City of London, Britain, March 29, 2016. REUTERS/Toby Melville

Britons vote in a referendum on June 23 to decide whether to remain a member of the European Union, which has clouded an already uncertain economic outlook. Opinion polls on the outcome have been close, but most have shown the country will probably remain in the bloc. tmsnrt.rs/1Ke31HF

“The MPC is highly unlikely to raise rates before the Brexit referendum,” said Oliver Jones at Fathom. “The only possibility for a rate rise in the near future, in our view, is if the UK votes to leave the EU and a sharp decline in sterling leads to very high inflation.”

All 55 economists polled this week said Bank Rate would be left unchanged when the Monetary Policy Committee meets on May 12 and the median forecast was for an initial hike of 25 basis points to come early next year, the same as in recent polls.

After the initial increase, which would be the first rise in nearly a decade, the MPC will follow up with matching increases in the third and fourth quarters, leaving the Bank Rate at 1.25 percent at the end of 2017.

Policymakers have repeatedly stressed any increases to borrowing costs would be gradual, and even by the end of 2018 the Bank Rate will only have reached 1.75 percent.

Bank Governor Mark Carney again said risks around the EU referendum were the biggest faced by the British economy and that interest rates would be likely to rise modestly and gradually in future.

“In the very short term the economy appears to be slowing, probably related to issues around the referendum,” he told the Stockport Express in an interview published on Thursday.

British economic growth slowed at the start of 2016 to 0.4 percent and a Reuters poll earlier this month didn’t predict much change to that rate through to the middle of next year. [ECILT/GB]

Of more concern to policymakers is inflation. It reached a 15-month high of 0.5 percent in March, but that is still well below the Bank’s 2 percent target, and few economists expect it to hit the target anytime soon.

So the median chance of an increase before this year ends fell to 30 percent from 40 in an April 4 poll. But the poll saw a 60 percent likelihood by the end of March 2017 and the median increases around 5 percent per quarter, with a 78 percent likelihood of an increase by the end of 2017.

When the Bank publishes its quarterly Inflation Report alongside its policy decision it will probably lower its growth projections but hold inflation forecasts steady, according to a majority of economists polled this week.

“I don’t think the Inflation Report is that important this time around. Everything is about the referendum,” said Mikael Milhoj at Danske Bank.

Polling by Deepti Govind and Sujith Pai, editing by Larry King

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