By Devayani Sathyan
BENGALURU, March 26 (Reuters) - The Bank of England will hold Bank Rate at 3.75% for the rest of the year, according to a narrow majority of economists polled by Reuters who have mostly abandoned their previous expectations for cuts but have not followed financial markets in expecting nearly three rate rises this year.
The U.S. and Israeli war with Iran has lit a fire under energy prices and upended previous expectations that British inflation would gradually fall, giving room for
a few more interest rate cuts.
Unexpected unanimity on the BoE's Monetary Policy Committee at this month's meeting to leave rates on hold and the resolve among policymakers to raise rates if needed has triggered the most dramatic reversals in forecasts for UK interest rates in years.
But economists disagree with financial market traders that the MPC will raise interest rates this year. British government bond yields have surged, earlier taking the benchmark 10-year gilt above 5% - its highest since 2008.
EXPECTATIONS FOR QUICK END TO WAR
For now, forecasts appear to be based on hopes the war will not drag on as well as the view that there is enough slack in the economy to afford policymakers time to wait and see if the surge in energy prices turns into wider inflation pressure.
"We do think the risk of hikes has increased and will continue to rise the longer the Middle East conflict persists," said Gabriella Willis, UK economist at Santander CIB.
"However, our baseline scenario still sees the Bank remaining on hold and sees value in it waiting to assess the scale and persistence of second-round inflation effects."
Around 90% of respondents, 45 of 50, expect the BoE to hold Bank Rate at 3.75% on April 30. Five expect a 25-basis-point hike, the March 20-26 Reuters poll showed.
Over 65%, 33 of 50, expect rates to remain at 3.75% through the end of September with only 12% expecting rates to move higher. A narrow majority sees no change through the end of the year.
That marks an abrupt shift from a poll two weeks ago when 80% of a similar group, 37 of 46, expected the rate to be at 3.50% or lower by the end of September, with 24 forecasting 3.25% or lower. None expected a hike.
INFLATION FORECASTS REVISED UP
About three-quarters of contributors in the latest survey revised up their year-end rate outlook, while a similar proportion raised their inflation forecasts.
Inflation is expected to average 2.8% next quarter before climbing to 3.4% in the second half. In the previous poll both forecasts were for around 2.4%.
Among 14 Gilt-Edged Market Makers polled, all but two expected rates to be on hold through the end of the year. Most of these GEMMs expected cuts earlier this month.
JPMorgan erased forecasts for two rate cuts starting next month to two hikes, starting in April. Goldman Sachs and Citi changed three rate reductions to none. Morgan Stanley was one of several binning their expectations for two cuts this year.
"We still think that a central bank that was due to cut rates prior to the recent events...is not likely to pivot to hiking as early as the market is currently pricing," noted Bruna Skarica, chief UK economist at Morgan Stanley.
"For now, we do think a lot more evidence on actual second-round effects emerging is needed before the majority of the MPC entertains hikes," she wrote, saying a rate hike before the second half of this year was unlikely, even if disruptions to Middle East oil and gas supplies persist.
(Other stories from the Reuters global economic poll)
(Reporting by Devayani Sathyan; Polling by Nushaiba Iqbal; Editing by Ross Finley and Hugh Lawson)
