UK rate hike still seen in Q1 2016; BoE's Carney brushed off

By Jonathan Cable

LONDON, July 20 (Reuters) - It will be early 2016 before the Bank of England raises interest rates from a record low, according to economists who largely brushed off hawkish talk last week from officials suggesting a rate rise might come earlier.

The British economy's strong momentum despite extremely low inflation now meant the decision on when to raise rates from 0.5 percent would come into sharper focus around the end of this year, Governor Mark Carney said on Thursday.

Some interpreted that to mean that rates might rise by the end of the year as the remarks followed news of higher pay growth and a hawkish speech from outgoing Monetary Policy Committee member David Miles, who said rates should rise soon.

But the latest Reuters poll of over 50 economists, taken after Carney's speech, said an initial 25 basis point hike wouldn't come until the first quarter, followed by an identical increase in the third quarter and one more before end-2016.

"Although many will take Carney's bold words as a clear hint that rates will rise this year, it is worth bearing in mind the similarities with last year's Mansion House speech," said Allan Monks, economist at JPMorgan (LSE: JPIU.L - news) .

"The Governor then warned that rates could rise earlier than expected ... But subsequent MPC (KOSDAQ: 050540.KQ - news) communications then presented a much more nuanced picture."

Goldman Sachs (NYSE: GS-PB - news) economist Andrew Benito, who held his forecast that rates won't rise until the second quarter of 2016, took it a step further:

"This indicates that Governor Carney's individual vote will likely be more finely balanced at the turn of the year, assuming the economy evolves as he expects. Yet, it does little to commit to voting for a rate rise even then."

"Instead, the statement does most to downplay the likelihood of voting for a rise in Bank Rate this year."

There is only a median 28 percent chance the Bank will have moved before year end, little changed from last month. But there is a 60 percent chance of a move before April - up from 55 percent on July 1 - and a more certain 75 percent likelihood Bank Rate has risen before July.

Over the past week, markets changed their bets and are now pricing in an initial hike in the first quarter, earlier than previously, with part of a hike by the end of the year now priced in.

Sterling also rallied to a 7-1/2 year high on a trade-weighted basis.

Only seven of the 46 economists polled expect a move this year - a proportion little changed from a June poll - and none of them expect any move when the Bank's MPC meets on Thursday.

Indeed, it will be August even before at least one of the nine MPC members votes for an increase, according to the poll.

If the Bank does wait until 2016 then its benchmark rate would have been at rock-bottom for around seven years and will put it just behind the United States Federal Reserve - which is widely expected to begin tightening policy in September.

All of the respondents to an extra question said it was either unlikely or very unlikely the Bank moves before the Fed.

In the medium term, Bank Rate would probably rise to about half as high as the historical average of around 4.5 percent, Carney said last week, and according to the poll at the end of 2017 it would still only be at 1.75 percent.

Britain's economy is expected to grow a reasonably robust 0.5-0.7 percent per quarter through next year and inflation is seen picking up towards the Bank's two percent target, although it will be at least 2017 before reaching it, the poll found.

Inflation is languishing near zero right now.

"Despite Governor Carney's hints, we think the BoE (Shenzhen: 000725.SZ - news) will wait until inflation is back above 1 percent before starting to raise interest rates," said Azad Zangana at Schroders (LSE: SDR.L - news) .

As prices are rising so slowly, wage growth - one of the Carney's key requisites for Bank Rate to rise - will be faster than inflation across the forecast horizon. (Polling by Khushboo Mittal and Siddharth Iyer; Editing by Ross Finley and Dominic Evans)