City bets on just one more rate rise

Most City economists believe the Bank of England will raise interest rates just one more time, but warn the move could come as soon as February.

Ten out of 15 top analysts quizzed by The Independent say only one more quarter-point hike is needed to get inflation back on track to hit its 2 per cent target, thanks to falling energy costs. Three think that rates have already peaked, while one sees them climbing to 6 per cent, a level not seen for six years.

Of those predicting at least one more increase, four say the move could happen next month. Others expect the Bank's monetary policy committee to sit on its hands until May, or even until the beginning of next year.

The MPC stunned financial markets and disappointed homeowners this month by unexpectedly lifting borrowing costs by a quarter-point to 5.25 per cent, the third such increase since August. Explaining its decision, it said output continued to rise at a "firm pace" and spare capacity in the economy appeared "limited", adding to price pressures.

Since then, figures have shown inflation on the targeted consumer prices index measure surge to 3 per cent in December, and retailers enjoyed their best Christmas for three years. The City bookie Cantor Index is quoting a spread of 530.5-533 for the MPC's next meeting on 8 February, implying no change, and 537-542 for the March meeting, indicating an increase.

Philip Shaw at Investec, one economist who expects rates to rise again next month, said: "The MPC has relatively little to lose by moving early, but lots of credibility to lose if it waits. There is uncertainty over the inflation outlook, but signs that pay settlements are creeping higher."

Robert Barrie at Credit Suisse, also predicting a February hike, said the MPC would be influenced by tactical considerations. "To do it in January and not to do it in February would be very odd, as next month's quarterly Inflation Report gives it the perfect opportunity to explain its thinking," he said.

Simon Ward at New Star, the only economist to predict correctly this month's rate rise, expects another increase, but not until next year. "The MPC has already raised rates quite significantly over a short period of time," he said. "We expect the housing market to come off the boil and the strong pound to keep a lid on inflation. But by the end of the year, the impact of higher rates will be starting to fade, and a further increase will be needed in the first quarter of 2008."

In the doves' camp is Karen Ward at HSBC, who believes borrowing costs have already peaked, and inflation will be undershooting its target by the end of the year. Malcolm Barr at JPMorgan agreed. "The MPC has made a hash of it, developing a predilection for rates hikes that is simply not justified," he said.