The Bank of England will raise interest rates again in July and there is a significant chance they will go to 6.0 percent this year, a Reuters poll showed after unexpectedly hawkish minutes from this month's rate-setting meeting.
The poll of 64 economists, taken on Wednesday after the minutes showed a split 5-4 vote in favour of steady rates at 5.5 percent, highlighted a shift among forecasters to bring forward to July calls for the next increase from August.
In the latest rates poll 44 of 64 economists forecast a July increase, while a dwindling number - 19 - predicted the Monetary Policy Committee will wait for the bank's August forecasting round before moving again. One economist said rates would go no higher.
But 18 of 64 economists said borrowing costs would hit 6.0 percent this year, up from 10 of 58 in a similar Reuters poll before the June meeting. "In the absence of weaker data over the next two weeks, we argue that a July move now looks probable," said George Buckley, chief UK economist at Deutsche Bank, who changed his call on Wednesday to a July increase instead of August.
"But we can expect to see another close vote - probably 5-4 in favour of a 25 basis point hike - given the lack of strong data published thus far since the June meeting," he said. The June MPC split saw the governor on the losing side of a vote for only the second time since the bank won independence in setting rates 10 years ago, and caught markets off guard.
Sterling jumped to a two-week high above $1.99 and front-month short sterling contracts fell sharply, reflecting an increased likelihood that the MPC will move. They have now fully priced in 6 percent rates by year end. The poll showed a median 90 percent chance that rates would hit 5.75 percent this year, while there is a 40 percent chance they would reach 6.0 percent.
This compared with 80 percent and 30 percent probabilities given by economists in a poll earlier this month. The June MPC minutes showed that the majority of the nine-member committee felt markets would have been surprised by a hike this month, which would have served only to push rate expectations higher than they should be. Some said the more hawkish tone from the June minutes marked a change to improve the bank's transparency. Economists have been sharply critical of the Bank since it surprised on two of the last four increases, last August and in January.
"Step one, they talked about a 50 basis point hike in May. Step two, (Governor Mervyn) King said they were looking at capacity constraints and inflation expectations," said Alan Clarke, UK Economist at BNP Paribas. "This is just the third piece in their more transparent communications policy."
The bank's challenge to control inflation, which surged to a series high of 3.1 percent in March but has since eased to 2.5 percent, was highlighted by a pick up in money supply growth to a 13.8 percent annual rate in May, the highest since October. But not all forecasters are sure when another hike will come. "Today's minutes bring the timing of that next move into greater doubt," said Gavin Redknap at Standard Chartered.
"Should data continue to show signs of weakness in the next couple of weeks one or more of the hawks may be persuaded to wait until the Bank's forecasting round."
One bank, Lloyd's TSB, said rates have peaked at 5.50 percent. Economist Kenneth Broux argued that bond yields have risen markedly since the May inflation report and there are convincing signs that consumer spending is slowing. "The cost of borrowing has become more expensive without the Bank of England having to hike," he said.
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