Bank of England could spring surprise interest rate hike: analysts

The Bank of England could shock markets with an interest rate hike on Thursday to keep inflation in check, despite expectations for no change because of slower economic growth, analysts said.

Most economists think the British central bank's rate-setting monetary policy committee (MPC) will leave rates at 5.00 percent for the fourth straight month after a two-day meet that starts on Wednesday.

However, pundits are not ruling out a surprise quarter-point hike to 5.25 percent after British 12-month inflation spiked to a 16-year high in June on the back of surging food and fuel prices.

The European Central Bank was also forecast to keep eurozone borrowing costs at 4.25 percent on Thursday amid concerns about record eurozone inflation coupled with sluggish economic growth.

On Tuesday, the US Federal Reserve left American interest rates at 2.0 percent, given the weakness of the world's biggest economy.

Analysts warned that British inflation would spike even higher in the coming months because of recent steep price increases from domestic gas and electricity suppliers.

Energy firm Centrica last week hiked its gas prices by 35 percent because of the rocketing cost of wholesale energy.

"Pressures for higher rates are likely to linger on the committee," said Investec economist Philip Shaw, who is calling for no change this month.

"Overall we cannot entirely rule out the risk that the committee will sanction higher rates this time.

He added: "Centrica's 35 percent increase in domestic tariffs suggests that inflation will hit 5.0 percent."

The country's annual inflation rate spiked to 3.8 percent in June -- which was almost twice the Bank of England's official inflation target of 2.0 percent.

Britain's economy, meanwhile, grew by only 0.2 percent in the April to June period compared with the first three months of 2008.

That was the slowest pace of economic growth for more than three years and brought Britain closer to the threat of recession -- which is defined as two or more successive quarters of negative growth.

"Inflationary pressures continue to prevent the MPC from cutting rates in response to the deteriorating real economy," added Capital Economics analyst Vicky Redwood.

"In fact, if interest rates change this month, they are more likely to go up than down."

The nine-member MPC was split three ways when they left interest rates unchanged last month, reflecting the dilemma they face in controlling soaring inflation whilst seeking to boost growth.

The committee voted 7-2 to leave rates at 5.00 percent in July. Policymaker David Blanchflower voted for a quarter-point cut while Tim Besley urged the BoE to lift borrowing costs to 5.25 percent.

"We suspect that most MPC members are still firmly in wait-and-see mode and in no hurry to move interest rates, given the current major uncertainties surrounding both the medium-term inflation and growth outlooks," said Global Insight economist Howard Archer.

The BoE's last interest rate move had been in April when it cut borrowing costs from 5.25 percent.