LONDON (Reuters) - The Bank of England is still expected to start tightening monetary policy early next year despite the significant risk of a prolonged period of disinflation, a Reuters poll found.
While some banks did push back forecasts, the median from a poll of over 40 economists taken in the past week still predicted British interest rates would rise 25 basis points from a record low of 0.5 percent in the first three months of 2016.
"Interest rates are simply too low, in my view. They were set according to emergency conditions prevailing in 2009 and the economy is on a much more solid footing today," said Peter Dixon at Commerzbank.
Britain's economy has been expanding relatively healthily compared to the troubled euro zone, its biggest trading partner. The poll suggested it would grow 0.6 percent per quarter through to the middle of next year, unchanged from last month's medians.
But while the poll said inflation won't return to the Bank's 2 percent target until 2017, 23 of 44 economists surveyed have a first quarter hike pencilled in, albeit a slightly smaller proportion than in a Sept. 28 poll.
Twenty of 28 said their conviction around the timing had decreased, with only one institution, which already had a call for a third quarter hike, saying its confidence had increased. Markets are not pricing in the first rise for another year.
An early 2016 move would put the BoE just a couple of months behind the United States Federal Reserve, which according to the latest survey is still expected to tighten policy in the world's largest economy at the end of this year. As with UK rates, markets don't think that will happen until well into next year. [ECILT/US]
When British interest rates do finally go up, the impact risks unsettling consumers who are driving the economy. Many remain stretched and household debt is high because many people are saddled with heavy property mortgages.
But as in all recent polls, the latest survey said increases would be gradual and predicted Bank Rate would only have risen to 2.5 percent by the end of 2018.
British inflation unexpectedly edged back into negative territory last month to match April's all-time low of -0.1 percent, official data showed on Tuesday, and 15 of 27 economists said the risk of a prolonged period of disinflation was significant.
One said it was very significant and one very insignificant. The remaining 10 said the risk was insignificant.
With the economy doing well, unemployment will likely fall and pay rises outstrip inflation. Indeed, 17 of 27 economists said wage growth would accelerate while eight said it would remain around current levels and only 2 said it would slow down.
Wage growth remains weaker than before the financial crisis but has picked up faster than the BoE expected earlier this year, helping restore spending power for many workers.
Pay growth edged up in the three months to August, although not as much as expected. The total earnings of workers - including bonuses - rose 3.0 percent on a year earlier.
Kallum Pickering at Berenberg said the central bank would want to see clear signs the labor market is becoming healthier b1220efore raising rates. "This (earnings) data will bolster the convictions of those in the MPC that believe the first rake hike is nearing," he said.
Bank Governor Mark Carney has repeatedly said wage growth would be a key indication of when interest rates could rise, but economists were almost evenly split on whether the BoE should wait for clear confirmation wage growth was on a sustainable upward path before tightening.
Polling by Sarmista Sen and Aaradhana Ramesh; Editing by Ross Finley/Ruth Pitchford