LONDON (MNI) – Bank of England Monetary Policy Committee member
Andrew Sentance broke ranks to vote for a rate hike at the June meeting,
but analysts think he will fight a losing battle this year, with most
not expecting the MPC to raise rates until either the first or second
quarter of 2011.

The median forecast in a Market News survey is for the MPC to hike
in Q1 next year, with some analysts in recent weeks having pushed back
their predictions for the timing of the first hike.

In the wake of global market jitters and eurozone turmoil,
financial institutions have been cutting global growth forecasts,
strengthening the case for their UK economists to scale back their BOE
rate forecasts.

The median prediction in the survey is for Bank Rate to stay at its
historic low of 0.5% this year before rising to 1.0% by the end of the
first half of next year and just 1.5% by the end of 2011.

George Buckley, UK economist Deutsche, had been predicting the MPC
would hike in November this year but has now pushed this back to
February.

“As the Governor (Mervyn King) always says, monetary policy is all
about assessing the balance of risks,” Buckley said.

Deutsche has also scaled down rate expectations for the European
Central Bank and the US Federal Reserve.

Nick Bate, UK economist at Bank of America Merrill Lynch, has
pushed back his forecast for a BOE hike from February next year
until May.

Bate said the BoA-ML economists had revised down their US 2011
growth forecasts to 2.6% from 3.3% and with the data coming out of
China, the US and the euro zone causing concerns.

Buckley says the BOE will have to cut its own 2011 growth
projection in its August forecast round.

The BOE’s most recent growth forecast, made back in May, is well
above the median of independent forecasters and the projections of the
International Monetary Fund and the UK’s own Office for Budget
Responsibility.

The BOE’s implied 2011 growth forecast is around 3.5% with most
others forecasters around a full percentage point below this.

Economists at Royal Bank of Scotland have been forecasting the
first MPC hike will come in November but they are looking at it again.

“We had stuck to a call of a rate hike in November but we think the
risks have shifted to the downside. So it looks like rates could be
lower for longer,” RBS economist Richard Barwell, who recently joined
RBS from the BOE, said.

Barwell cites the primary concern as being developments in
financial markets.

Grant Lewis, head of economic research at Daiwa Capital Markets,
said he can’t see the MPC hiking this year “unless you take the view the
risk aversion that is haunting all the markets and all the economies is
going to dissipate by year end.”

Lewis added that in the kind of bear markets we are in at the
moment “raising rates would be very brave” – with ‘brave’ a euphemism
for reckless.

Rising UK inflation expectations have come at a time when downside
risks are in the spotlight.

David Owen, chief financial economist at Jefferies, says the “whole
situation is very fluid at the moment,” noting the signs of weakness in
the world’s leading economies at the same time as recent UK inflation
outturns have surprised on the upside.

The implications of the much publicised divisions within the MPC’s
ranks are played down by the analysts.

Bate says that, aside from his former colleague Tim Besley,
“Sentance has been the most hawkish MPC member going back 2-3 years.”

“Clearly he is on his own at the moment” Bate adds.

Economists say BOE Chief Economist Spencer Dale would likely be
the next in line to back a hike.

Analysts point out, however, that there is a strong block on the
MPC, including King and Executive Director Markets Paul Fisher, who are
acutely aware of the downside risks facing the economy and who are very
wary about early tightening.

“We need to be sensitive to the risk of tightening policy
prematurely, stifling the nascent recovery. In that case, some of the
flexible response to the recession could be swept away, delivering
higher unemployment, more company failures and the risk of
inflation significantly undershooting the target,” Fisher said in a
speech last month.

Even MPC member Adam Posen, who said recently that higher inflation
expectations were feeding through to higher inflation, stressed the
risks on both sides of the UK outlook.

But Posen talked about the UK economy “switching between two states
– a recovery, which we are now in, albeit perhaps an initially weak one
… and the renewal of a severe recession if not outright deflation.”

No analysts is expecting any change in MPC policy at the July
meeting and only one economist is predicting any tightening before
November.

Markets are taking a still more dovish view of the rate outlook
than analysts. SONIA is now only pricing in around 20bps worth of rate
hikes in the next 12-months, which has been pared back from 37bps in
June and around 50bps in May.

The Market News BOE rate survey accompanies this article, with the
MPC announcement due at 1100 GMT Thursday.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$,MABPR$,MT$$$$]