–Analysts Divide Over May or August Hike: Median Forecast Is Aug
–Pace Of MPC Tightening Seen Gradual; Debate On Timing Of 1st Hike

LONDON (MNI) – The majority view among analysts is that the
Bank of England’s Monetary Policy Committee will only raise Bank Rate
gradually from its current record low 0.5% and by the end of next year
it will be a mere 2% or so.

The heated debate is all about when the first hike will come. A
Market News survey ahead of the March MPC meeting found one group of
analysts predicting a May hike, another group an August one with a
minority forecasting tightening would be even longer delayed.

Of the 39 analysts surveyed 13 predicted a Q2 hike, essentially
May, 11 predicted a third quarter hike, typically August, with the
median for a Q3 move. Analysts have, on balance, reacted to recent
newsflow by bringing forward their predictions for rate hikes without
altering their forecasts for where Bank Rate will end up.

A survey ahead of the February meeting found analysts’ median
forecast was for no hike until the fourth quarter. The median forecast
of where Bank Rate would be, at 1.0% at the end of 2011 and 2.0% at the
end of 2012, was the same in both surveys.

Since the poll ahead of the February meeting there have been two
key publications from the BOE. The first was the February Inflation
Report, which showed the MPC forecasting a roughly equal chance of
inflation being above or below the BOE’s 2.0% target two years’ ahead if
market expectation of roughly 25 basis points of tightening a quarter
were met.

The second was the MPC minutes which showed three of the nine
member committee voted for a hike at the February meeting and “most
members agreed … the case for withdrawing some of the current
exceptionally accommodative monetary policy had … been strengthened.”

It is hardly surprising given those pieces of news that analysts
are attaching a high probability to a May hike. Of the 19 survey
respondents who put a probability on a May hike, the range was from 15%
to 80%, with a median probability of 60%.

One key reason analysts do not see May as a surefire bet is the
data flow could head it off. As the February minutes stated some MPC
members want, after the shock contraction in Q4 GDP, to wait for more
data on how the economy performed at the start of the year before
backing a hike.

Analysts who expect the reality will turn out to be a weak
recovery in the first quarter can make a reasonable case that the MPC
will end up holding fire.

Hetal Mehta, economist at Daiwa, said that while the chance of a
May hike was high, she puts it at 30 to 40%, she only expects
0.4% growth in Q1 GDP. That would be sub-trend and would still leave
GDP, in level terms, below Q3. With the Q1 GDP data out ahead of the
May meeting such an outturn could be enough to postpone a hike.

David Owen, economist at Jefferies, is still not expecting the
first increase to come until November.

Owen highlights the unconvincing case being made by some, most
including MPC member Martin Weale, that Bank Rate should rise to curtail
the threat of high current inflation translating into higher wage
settlements.

When Weale was pressed, at the recent Treasury Select Committee
hearing, for evidence in the UK of a wage price spiral he could not
provide it and Owen says he cannot envisage Weale’s colleagues being
persuaded of his case.

Owen argues that what evidence there is of any significant pick-up
in wage settlements is thin. A recent survey from Incomes Data Services
showing a marked rise in pay settlements was based largely on early year
manufacturing pay deals, and that sector has outperformed services,
while in April millions of public sector workers face a pay freeze.

It is a point echoed by other economists, one of whom said the
talk among officials was that second round inflation risks remained
theoretical while the reality at present was of hard pressed UK
consumers.

A hike at the end of the March meeting, at 1200 GMT Thursday, is
not ruled out by most economists – the median probability is put at
one-in-five, but there seems little reason for the MPC to shock the
markets, which are pricing in a May hike.

The widespread expectation is that March and April will be a
sideshow, with the focus firmly on the May meeting, when MPC members
will have a new set of quarterly BOE forecasts and the Q1 GDP data to
help make up their minds.

–London newsroom: 00 44 20 7 862 7491; drobinson@marketnews.com

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