May Bank of England interest rate hike now in play - Reuters poll

By Jonathan Cable

LONDON (Reuters) - Borrowing costs in Britain will probably increase in May, earlier than previously thought, according to a Reuters poll taken after the Bank of England said last week it was likely to hike earlier and by more than it thought only three months ago.

A firm majority of economists, 32 of 57, polled Feb 9-13 after the Bank concluded its policy meeting and news conference, said it would raise its Bank Rate to 0.75 percent in May, alongside its next quarterly Inflation Report.

In a January poll, only 13 of 71 economists had a rate hike in their forecasts for next quarter.

Last week, the central bank's Monetary Policy Committee voted unanimously to leave the rate at 0.5 percent, but Governor Mark Carney and his colleagues said they saw a growing need to keep a grip on inflation.

Inflation skyrocketed after Britons voted to leave the European Union in June 2016, driven in large part by a slump in sterling, which made imports more expensive.

January inflation, released on Tuesday, held at a near six-year high of 3.0 percent, well above the BoE's 2 percent target. It is expected to average 2.5 percent this year and 2.1 percent next, the latest poll found.

The BoE first raised rates in the current cycle by 25 basis points in November, a move economists warned beforehand would be a mistake.

There is likely to be another 25-basis-point rise next quarter, according to the median view in the latest poll, coinciding with expectations for other central banks to move towards tighter policy a decade after the financial crisis.

That move is forecast to be followed by another 25-basis- point hike early next year and then another increase towards the end of 2019, pushing up the Bank Rate to 1.25 percent.

"Following some particularly hawkish comments, we now expect a rate hike in May," said James Smith at ING. "The key arguments underlying the Bank's decision to hike rates in November – expectations for stronger wage growth and higher, global- demand-driven economic growth – are materialising, and in some cases, materialising faster."

Signs British wages are beginning to grow more quickly, along with ongoing global economic strength, have bolstered the case for higher interest rates, BoE policymaker Gertjan Vlieghe said on Monday.

The UK economy is holding up relatively well, so it's likely rates will rise earlier than thought in late 2017, Vlieghe's colleague Ian McCafferty said on Monday.

Just over half of economists who answered an extra question said May was the right time for the BoE to hike. Twenty-one of 43 said it wasn't.

"As uncertainty remains high and growth has slowed - despite partly driven by lower potential GDP growth - we think it is better to stay accommodative," said Mikel Milhoj at Danske Bank.

Prime Minister Theresa May will attempt to unite her feuding cabinet and convince a sceptical European Union that Britain knows what it wants from Brexit in a series of speeches over the next few weeks.

Britain is hoping to seal a transition deal next month to smooth its exit from the EU, then reach agreement on a long-term trade agreement later this year. However, Brussels said last week a transition deal was not a certainty.

There is a median 20 percent chance of a disorderly Brexit, where no deal is reached by the end of March 2019, the poll showed. Reuters polls have repeatedly said this would be the worst outcome for both growth and sterling.

"It is in nobody's interests that Brexit is disorderly, so I still maintain that a compromise is likely, though it may well be reliant on the goodwill of the EU27," said Peter Dixon at Commerzbank.

SLOW GROWTH

Britain dodged the recession predicted following the decision to leave the EU and last year the economy performed better than had been expected. But that came alongside a buoyant global economy, and Britain's economy is lagging the euro zone.

The chance of a recession this year is only 10 percent, the median forecast said, less than the 15 percent given last month.

Growth slowed sharply in January, according to a survey published last week, and uncertainty surrounding what divorce deal Britain and the EU comes to is deterring businesses from investing.

Consumers, who were behind much of the previous expansion, spent less last month than the year before, causing spending in January to fall for the first time since 2013, according to a survey which underscored many households' caution about their finances and the approach of Brexit.

Gross domestic product is forecast by the latest poll to expand 1.5 percent this year and next, much weaker than its Britain's peers, as well as the central bank's own forecasts.

(Polling by Vivek Mishra and Mumal Rathore, editing by Larry King)