POLL: Bank of England to raise interest rates in December

POLL: Bank of England to raise interest rates in December

Economists polled by Reuters have polled the Bank of England that it will be the first major central bank to raise interest rates, but the initial increase comes as soon as next month or if it waits until early next year.

Britain's central bank surprised markets - but not a majority of the economists surveyed in October - by leaving Bank rate unchanged at a record low of 0.10% last week.

While the median forecast in the Nov. 8 - 12 poll was for a 15 basis point increase on Dec. 16 but just under half of those polled, 21 of 47 said the Bank would hold firm. It would be its first December increase since 1994 if it does act next month.

The meeting in December was clearly "live." Marchel Alexandrovich told Jefferies that the two upcoming labour market releases will be particularly important for the MPC.

If both are decent, the majority of the MPC could be minded to increase Bank rate by 15 basis points in December. If the December report is on the soft side, it would be more prudent for the decision on rates to be delayed until February. Markets are priced in a December rise.

While economists' forecasts for a December increase were on a knife edge, a rise in the first quarter of 2022 appears to be baked in, most likely in February when the Bank published its quarterly Monetary Policy Report. The increase is expected by the end of March, according to one of 44 economists.

The Bank was adding another 25 basis points in the second quarter before pausing until the beginning of 2023 when it will take borrowing costs to 0,75%. In October, that third increase was pencilled in for the latter half of 2023.

Britain's economic recovery due to the coronaviruses lagging behind that of other rich nations last quarter. The country was under lockdown in early 2021 because of a GDP growth of 1.3%, which was the weakest three-month growth since the country was under a lock down.

The country faces a further headache because of Brexit, which has further exacerbated supply chain issues caused by the pandemic.

It will be difficult to disentangle the impact of the pandemic from Brexit, which will become clearer through time. The relative weakness in business investment and trade likely reflects some impact from the new trading relationship, said Allan Monks at JP Morgan.

The growth in this quarter and next was put at 1.0% and 0.8% respectively, both weaker than predicted last month. The growth in 2022 was forecast at 5.0%, and in 2023 at 2.1%, unchanged from last month. The economy was expected to be back to pre-COVID levels by the end of March, almost 75% of respondents said.

While weaker growth would likely stay the BoE's hand, inflation forecasts have increased and will remain more than double the Bank's 2.0% target for a longer period.

Inflation will have 4.1% this quarter, 4.2% next and 4.2% in the second quarter of 2022. The forecasts last month were for 3.9%, 4.0% and 3.5%. The average for 2022 was 3.2%, up from October's 2.8% forecast.

Governor BoE Andrew Bailey said last week the Bank would act if it sees expectations of higher inflation pushing up wages, having previously said it would have to act to contain inflation expectations.

Unemployment levels were seen pretty stable, peaking earlier next year at 5.0% before falling down to 4.6%, giving some comfort to policymakers who are debating whether or not to raise rates.

The labour data are quite strong, according to Brian Hilliard at Societe Generale, who expects a December increase.