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Bank of England rates seen steady next week

LONDON: After a quick succession of interest rate rises, the Bank of England will hold fire this month to avoid adding more fuel to the pound's strength, economists predict.

"The Monetary Policy Committee has given a clear signal that they are prepared to hold fire for now in the hope that sterling will drift lower," said Stuart Edwards at S&P MMS.

Thirty-three out of 36 economists canvassed by Reuters forecast the short-term repo rate would remain at 6.0 percent when the Bank's Monetary Policy Committee meets on March 8-9. One economist said the odds were evenly split, and two forecast a rise at this month's meeting.

According to the median forecast, there is a 75 percent chance of a no change vote at next week's meeting. Economists saw rates peaking at 6.5 percent in this cycle, with most predicting the high would come this year.

The MPC has raised the repo rate by 25 basis points four times since last October.

Expectations that the MPC would make no change rose this week when BOE Governor Eddie George said sterling GBPEURGBP was significantly overvalued and that all MPC members would be happier with a lower pound.

Earlier in the week MPC member David Clementi had said that there could now be an opportunity to adopt a "wait-and-see" approach to interest rates.

"The UK rate debate is still revolving furiously around the trade-off between the strong pound, the damage being inflicted on the UK export sector and the exigencies of the over-heated demand conditions in the domestic economy," said David Brown at Bear Stearns.

But as long as members of the MPC try to talk down sterling, rates will remain steady this month, economists said.

"Barring a sterling collapse over the next few days, we expect the rest of the Monetary Policy Committee to fall in line with George and Clementi and vote to leave the repo rate at 6.0 percent for another month," said Mark Ramsden at Stone & McCarthy Research. With more rate rises predicted from the U.S. Federal Reserve Bank and European Central Bank, the MPC have further reason to tread cautiously. "They may be tempted to wait and see the reaction from sterling to the expected rate rises from the Fed and ECB," said Mark Cliffe at ING Barings.

Still, economists said another rate rise is on the cards in the spring because the MPC will be worried about Britain's overheating housing market.

"A booming UK housing market remains anathema to the MPC's perceptions about price stability ahead," said Brown.

However, the MPC may rather wait until May to tighten. "The fact they (MPC) have been pre-emptive and the almost complete absence of high street price pressures should allow the committee to feel comfortable leaving rates on hold for the next couple of months," said Steve Pearson at Halifax Plc.

But Richard Jeffrey at Charterhouse, who gave a 75 percent chance of an interest rate rise next week, pointed to further signs of overheating in the economy in the form of excess domestic demand and labour cost inflation as a good enough reason for the MPC to tighten again this month.

David Smith at Williams de Broe also predicted a rise in rates citing the increase in private sector earnings in December, robust retail sales, buoyant demand for labour and the prospect of the government budget on March 21.

"However, we suspect that the MPC will finally decide in the light of the strength of the sterling index ahead of their rate decision, and that the strong trade-weighted pound will limit the rise to a quarter of a percentage point," he said.-Reuters