Carney to signal if early 2016 rate rise is still on cards

By David Milliken

LONDON (Reuters) - The prospect of an interest rate hike by the Bank of England early next year could be revived on Thursday when Governor Mark Carney presents the British central bank's latest economic forecasts.

The BoE cut rates to a record low 0.5 percent in March 2009, around the nadir of the financial crisis, and has kept them there ever since.

It had been expected to start raising borrowing costs early next year, but since the BoE published its last outlook on the economy in August, investors have pushed back bets on the timing of a rate hike to late 2016.

That reflects China's economic slowdown, British inflation falling back below zero and the Federal Reserve's reluctance to start raising U.S. interest rates from crisis-era lows.

But with signs that Britain's economy has not suffered a big hit from China's financial market turmoil, some economists think another BoE policymaker might join the one dissenter who has voted for a rate rise since August.

A pointed remark from Carney, or forecasts that show inflation significantly overshooting the Bank's target would also renew expectations of a rate rise as soon as February.

"We believe the Governor will want to keep markets and borrowers alike alert to the possibility of tighter policy well before the end of 2016, where the first hike currently seems to be priced in," UBS economist David Tinsley said.

Normally the kind of solid domestic growth and plunging unemployment seen in Britain over the past two years would justify higher borrowing costs.

But inflation has been pushed below zero by falling oil prices. And while wage growth is rising, it is still not strong enough for inflation to hit the BoE's 2 percent target in the next two to three years.

More recently, a slightly bigger than expected slowdown in growth in the three months to September caused concern, though October purchasing managers' surveys this week have pointed to a stronger end to the year.

The BoE faces a similar dilemma to the Fed, which is weighing up whether to raise U.S. borrowing costs next month.

Carney and his colleagues face the added complication that raising rates before the Fed could push sterling to its highest level in years, further squeezing hard-pressed manufacturing exports and depressing inflation even more.

Carney has said a decision on when to raise rates would come into "sharper relief" around the turn of the year, but in his most recent media interview the phrase did not appear.

Re-using that language or hinting that markets had misjudged the likelihood of a rate rise could revive bets on an early 2016 move. The BoE has talked up the prospect of rate rises in the past, however, only to be unable to follow through.

Former BoE policymaker Andrew Sentance, who now advises accountants PwC, said a rate rise was overdue and there was too much focus on the minutiae of timing the first move.

"The British recovery is now in its seventh year," he said.

"When we cut interest rates to 0.5 percent, it was when the economy was in danger of disappearing into a deep, dark hole. The notion that we have the same monetary policy now as we had then doesn't seem right to me."

Many other economists say the decision is more finely balanced. They will seek guidance from the BoE's forecast for inflation in two years' time, which is based on recent market rate expectations and in August stood at 2 percent. If it rises, this would imply the BoE could move before markets think.

(Editing by William Schomberg and Catherine Evans)