LONDON, Feb 5 - With Britain's economy surging ahead, economists say it is almost a done deal that the Bank of England will raise interest rates again on Thursday, increasing the gap with the euro zone. The bank was the first major central bank to put up short-term borrowing costs following a period of falling rates around the globe when it hikjed by a quarter point in November. It looks increasingly likely to lead the pack again. The BoE is expected to raise its benchmark overnight bank lending rate to 4.0 percent from 3.75 percent when policymakers conclude their two-day meeting later on Thursday, according to 43 out of 46 economists polled by last week. Provided the European Central Bank keeps rates unchanged at its Thursday meeting as the market expects, that would take Britain's borrowing costs to double the two percent prevailing in the euro zone, its biggest trading partner. "We are confident that the strength of the domestic data over the past month will justify a 25 basis point hike," said George Buckley, economist at Deutsche Bank. "There is a feeling within the market that (Thursday's) decision is a done deal," he said. There is scant evidence that the BoE's last quarter point hike did much to put the brakes on rapid growth. The British economy raced ahead in the latest quarter at its fastest clip in over three years and that momentum has picked up in the new year.
The latest report showed Britain's vast services sector last month put in its best performance since June 1997. The last time the services sector was growing that strongly the BoE was in the middle of four consecutive monthly rate rises. Cash registers were ringing across the nation over the Christmas period and consumer borrowing has slowed only marginally since the Bank last put up rates in November. Meanwhile house prices saw the biggest monthly gain in 15 months in January, the Halifax bank said on Wednesday. Even the manufacturing sector has suddenly come to life and has plans to expand capacity and jobs in the months ahead after a seven-year slump.
CURRENCIES THE WILD CARD
One argument against a rate rise is the weak dollar, which hit an 11-year low against sterling last month. The pound has been relatively steady on a trade-weighted basis but policymakers were already worried last month the dollar's recent slide against the euro could derail recovery in the euro zone. Though the U.S. currency appears to have stabilised somewhat ahead of a crucial Group of Seven meeting this weekend, financial markets are increasingly nervous that if that does not issue a strong statement on currencies, the dollar's slide could start anew. The pound's rise so far should also temper the BoE's profile for inflation over the next two years but this will likely be more than offset by the surprising strength in domestic demand. The BoE's February Inflation Report next week is therefore almost certain to contain higher forecasts for both growth and prices. Inflation, at 1.3 percent, remains well below the Bank's 2.0 percent target but policymakers have predicted an acceleration through this year Many analysts also hold the view the MPC is more inclined to adjust monetary policy during the same month as it publishes its quarterly Inflation Report -- what policymakers did the last time they raised rates. //