POLL-BoE to hold rates at 3.75% this year, but growing minority expect a hike

By Devayani Sathyan and Jonathan Cable

BENGALURU/LONDON, May 13 (Reuters) - The Bank of England will hold borrowing costs at 3.75% this year, a Reuters poll of economists found, though over a third expect at least one rate hike as the Iran war fuels an energy price surge that drove up inflation forecasts.

Financial markets are more certain, pricing in two rises this year.

The BoE said after its meeting last month that the worst-case fallout from the war could lead to "forceful" rate increases though less damaging outcomes may not require any.

BoE Governor Andrew Bailey told Reuters last month investors should not necessarily expect hikes. But at the April meeting, BoE chief economist Huw Pill broke with other Monetary Policy Committee members and voted for a rise.

"We continue to expect the BoE to remain on hold this year as financial conditions have tightened and the labour market continues to loosen," analysts at Goldman Sachs said.

"That said, we see a low hurdle for the BoE to deliver a couple of hikes during the summer if energy price pressures continue to build."

The outlook has become more politically and economically fraught following a bruising local election for Prime Minister Keir Starmer that prompted calls for his resignation. Investors are increasingly uneasy about Britain’s fiscal footing just as elevated gilt yields and energy risks tighten financial conditions.

Still, several respondents said elevated gilt yields and tighter financial conditions may already be doing some of the Bank’s work, reducing the need for a more aggressive tightening cycle despite mounting inflation risks.

The May 11-13 poll's steady outlook comes even as inflation jumped to 3.3% in March and is expected to peak at 3.6% in the fourth quarter - almost double the central bank's 2.0% target.

Nearly 40% of the 56 economists surveyed expected at least one rate hike by end-2026, up from 23% in the April poll and a sharp shift from earlier this year when nearly all said the next move would be lower. Seven predicted at least one reduction in the latest poll.

"We are adjusting our assumptions for the impact of the Middle East conflict on the UK economy. Of the three scenarios we set out in March – the good, the bad and the ugly – we are moving our base case from the good to the bad," said Elizabeth Martins, senior economist at HSBC.

Martins now sees two 25 basis point increases this year compared to none predicted in April.

Last month, policymakers abandoned a single central forecast and instead laid out multiple scenarios, signalling growing uncertainty over how inflation and the broader economy would evolve.

Most economists who answered an additional question said renewed cost-of-living strains had either already begun or would emerge within three months.

Weak growth forecasts were largely left unchanged with the economy expected to grow 0.8% this year and 1.2% next.

(Other stories from the Reuters global economic poll)