Economists see diminishing chances of a British rate cut this year but few are ready to agree with money market bets on a rate rise in 2006, according to a Reuters poll.
The survey, carried out April 26-28, showed 22 out of 45 economists expect the Bank of England to keep its benchmark repo rate on hold at 4.5 per cent to the end of this year, while 17 stick with forecasts for a cut in 2006 and six expect a rise.
Median forecasts showed a cut in the first quarter of next year, to 4.25 per cent, but rates are then predicted to revert to 4.5 per cent by the end of 2007.
Last week's poll suggested that expectations of a cut have faded a little since last month, when 19 of 42 economists forecast a cut, six a rise and 17 no change this year. But the majority view among economists remains at odds with the money markets.
Short sterling interest rate futures are pricing a four in five chance of a quarter point hike by the turn of the year.
Only one of the economists polled last week, Lai Wah Co at the Confederation of British Industry, expected the bank to announce a rate cut after its May 3-4 policy meeting. All the rest predicted no change just yet.
The survey was carried out after economic data showed headline inflation dropping to an unexpectedly benign 1.8 per cent in March, while the economy grew at a steady 0.6 per cent quarter-on-quarter in the first three months of 2006.
"The Bank of England will be encouraged by the recovery in GDP growth and the recent improvement in business sentiment," said Michael Penn at Merrill Lynch.
"But with the labour market continuing to weaken and retail sales remaining lacklustre, the Bank seems content with rates at 4.5 per cent," Mr Penn added.
Expectations of a cut in coming months have been eroded by the recent voting record of Bank of England policymakers.
Stephen Nickell, who has cast a lone vote in favour of a cutat the monetary policy committee's last five meetings, is due to step down after the May 4 meeting, while Kate Barker, generally regarded as one of the more dovish committee members, said this week that she saw no pressing need for a rate cut.
But Philip Shaw at Investec said money markets were wrong to assume that the Bank of England would have to fall into line with moves by other major central banks to tighten monetary policy. "This is being driven by rate hike fever outside the UK and is unwarranted by domestic fundamental factors," he said.