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No clarity from economists on clarity of BoE's new policy: Reuters poll

A plaque depicting Britannia is seen on the outside of the Bank of England in the City of London February 4, 2010. REUTERS/Toby Melville
A plaque depicting Britannia is seen on the outside of the Bank of England in the City of London February 4, 2010. REUTERS/Toby Melville

By Jonathan Cable

LONDON (Reuters) - The Bank of England's revamped forward guidance has split economists in a Reuters poll as to whether it has improved clarity about where British interest rates are headed.

While the 64 economists polled this week were unanimous in saying the Bank Rate would be left unchanged at a record low of 0.5 percent on March 6, there was no consensus on what they thought of Governor Mark Carney's updated guidance.

While inconclusive, this shows how tough it is for markets to make sense of the new policy, which is more complex than the previous one but aimed at reducing uncertainty over the timing and speed of any future interest rate rises.

Within six months of tying monetary policy to joblessness, the central bank was forced to abandon its initial plan after unemployment fell within a whisker of its 7 percent target three years earlier than when they first forecast it would.

Instead, it said earlier this month it would focus on 18 separate measures of data in order to gauge the right time to start raising rates.

Twenty-five of the economists who answered an extra question said the new guidance provided more clarity on the Bank's monetary policy path but 22 said there was less clarity.

"The previous incarnation of forward guidance was flawed but at least we knew what the BoE was looking at," said Peter Dixon at Commerzbank, one of the dissenters.

With the Bank focusing on measures including spare capacity in Britain's economy, business surveys and the number of hours worked, economists said it gave the BoE more room to operate but would also make it harder to guess the next moves.

"It's good for them to be flexible. I don't think they can give clarity about what they are going to do with interest rates down the road," said Michael Saunders at Citi.

Saunders had one of the most aggressive calls for additional quantitative easing - or stimulus - before the focus switched to tightening policy. He is now one of the few economists who expect a rate hike this year.

"I don't think it's a bad thing that they are not over-promising what they can do," he said.

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The Bank has stressed there is no rush to raise interest rates. Earlier this month it suggested that expectations for a hike in the second quarter of 2015 would be consistent with keeping inflation at its 2 percent target.

As in the last several Reuters polls, that was when the first 25 basis point hike in Bank Rate was predicted to take place, followed by a similar move in the third quarter.

But Monetary Policy Committee member Ian McCafferty told Reuters this week uncertainty over how Britain's economy will perform in coming months means the chances the BoE will move either earlier or later were "reasonably well balanced.

The economy - still smaller than before the financial crisis began - grew 0.7 percent in the final quarter of last year, taking full-year growth to its fastest pace since 2007, as business investment and trade picked up.

Accelerating business investment is essential to securing long-awaited growth in productivity, according to the BoE, and is something it expects to happen this year.

It has linked low interest rates to the amount of spare capacity in the economy, which is something that is very difficult to estimate and virtually impossible to measure.

Still, only six are forecasting a rate move this year, with a median 30 percent chance of a rate hike happening based on all respondents' answers to a question on probability.

That median probability jumps to 80 percent for a hike before next year ends and a near-certain 95 percent that the Bank will have raised rates by the end of 2016.

(Additional reporting and analysis by Swati Chaturvedi and polling by Diptarka Roy Editing by Jeremy Gaunt)

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