Price surge hurts BoE credibility, UK rate rise seen in Q4-poll

By Andy Bruce

LONDON, June 2 (Reuters) – Surging British consumer prices have taken their toll on the Bank of England’s inflation-busting credentials, a Reuters poll showed, but a slim majority of economists still rate the bank’s reputation as “strong”.

The monthly survey of 63 analysts also forecast the Monetary Policy Committee (MPC) will now wait until the fourth quarter to hike interest rates from their record low 0.5 percent, compared with the third quarter seen in a May 11 poll.

There were clear signs that the high levels of inflation — 4.5 percent on the year in April — have started to affect the bank’s credibility among economists.

Additional questions on the BoE’s inflation-targeting credibility showed 27 analysts from 48 responses thought it was still “strong”, but that was a far smaller majority than seen in comparable surveys in January and last June.

Seventeen thought the bank’s credibility was “weak”, and four said “very weak”. None said it was “very strong”, a verdict perhaps made impossible by the fact inflation has strayed above the BoE’s 2 percent target since December 2009.

“We firmly believe that the committee is doing the correct thing by keeping interest rates low, but it runs the risk of its credibility coming under threat at some stage if markets lose patience with high levels of inflation,” said Philip Shaw, chief economist from Investec.

Comments from respondents covered a wide spectrum of opinion, from scathing indictments of bank policy to evenhanded arguments that the MPC has done the best it can against a difficult economic background, both domestically and abroad.

The range of views has been no less diverse among the nine economists serving on the MPC. Andrew Sentance, the arch-hawk who stepped down on Tuesday, warned the bank’s failure to raise interest rates risks undermining its credibility.

On the other side of the argument, Adam Posen has publicly staked his place on the MPC should his long-standing calls for more quantitative easing turn out to be wrong.



Given the extent to which inflation has been boosted by a hike in VAT sales tax and the commodities boom earlier this year, some economists questioned whether the BoE’s inflation- targeting mandate was still appropriate.

“The problem is not so much a lack of credibility as the flawed nature of the target, which is susceptible to government policy changes (VAT) and international pressures (commodities), whilst using an instrument which cannot be expected to impact on either,” said Peter Dixon from Commerzbank.

Britain’s economy made a sluggish start to 2011, and the latest economic data have been mixed at best.

While there have been modest signs of improvement this week from the UK’s construction sector, manufacturing growth last month hit its lowest pace in 20 months and mortgage approvals unexpectedly fell, data on Wednesday showed. Cuts in public spending as the government strives to cut public debt are expected to weigh on consumption this year.

The poll, taken over the last week, showed economists pushed back their median forecast for the next BoE interest rate hike to the fourth quarter, after a May 11 poll suggested the third quarter was the most likely.

“Whenever interest rates do start to rise, the probability is that they will move up relatively gradually and stay very low compared to past norms,” said Howard Archer from IHS Global Insight.

“Monetary policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze.”

While the poll showed a 90 percent chance there would be no change to policy at the MPC’s June 9 meeting, respondents gave a 70 percent probability there would be a rate hike before the end of the year.