By William Schomberg
LONDON (Reuters) - The Bank of England heads into its most unpredictable interest rate decision in years this week, leaving investors and analysts on edge about the chance of its first hike since the pandemic struck the world economy.
Inflation in Britain looks set to rise to 5% - more than double the BoE's 2% target - despite a slowdown in the economy's recovery from last year's slump, and BoE Governor Andrew Bailey has talked of the need to act to contain inflation expectations.
Two of the other nine Monetary Policy Committee members have voiced similar concerns ahead of Thursday's 1200 GMT announcement.
But a further two say there is little they can do to fix the root cause of accelerating prices: bottlenecks caused by the reopening of the world economy which might fade quickly.
The remaining four MPC members have stayed quiet, adding to the suspense as to whether the BoE will become the first of the world's biggest central banks to raise rates after the coronavirus crisis.
On Wednesday, the U.S. Federal Reserve looks set to approve plans scale back its bond-buying programme, a pre-cursor to a rate hike that investors expect from mid-2022..
"Will they, won't they?" analysts at BofA Securities said in a note to clients about the BoE's November meeting.
The analysts predicted the MPC would vote 6-3 to raise Bank Rate to 0.25% from its record low of 0.1%, after Bailey's comments prompted a surge in bets in financial markets on a hike.
"Disappointing (markets) now, we think, would be Bailey's least preferred option," they said, though they hedged their bets, saying that a rate rise was not a done deal.
Last week's big spending budget https://www.reuters.com/world/uk/uks-sunak-tries-move-covid-with-new-spending-plans-2021-10-26 announcement by finance minister Rishi Sunak could also nudge the MPC to hike rates.
Andrew Goodwin at consultancy Oxford Economics predicted a 6-3 MPC vote in the opposite direction to keep rates unchanged - the consensus view in a Reuters poll of economists.
Goodwin said the BoE would probably keep Bank Rate on hold a bit longer while it waits to assess the impact on the job market from the end of the government's furlough scheme https://www.reuters.com/world/the-great-reboot/end-furlough-brings-uncertainty-uk-jobs-economy-2021-09-28, something the MPC said in September it would do.
"With rising inflation mainly due to global factors and households facing considerable cost-of-living challenges over the winter, we think a tightening of rates by the MPC would be a mistake," Goodwin said.
Raising rates now would be an abrupt shift from September when all nine MPC member voted to keep them on hold.
Since the BoE was granted operational independence in 1997, it has raised rates only six times immediately after a unanimous vote for no change.
While economists differ on what the BoE will announce on Thursday, there is broader agreement that it is unlikely to raise rates by as much over the next year as investors expect.
"We don't have a high degree of confidence in our forecast of exactly when the MPC will raise interest rates in the next four months," Paul Dales at Capital Economics said.
"But we are more confident the MPC won't raise rates as far as the 1.25% discounted in markets by end-2022."
Dales said inflation could be back close to the BoE's 2% target by the end of next year.
The MPC could try to dial back investors' rate hike expectations by projecting a fall in inflation below 2% in two to three years' time, based on current market pricing.
Dales said the BoE could also simply repeat its expectation of a "modest" tightening of monetary policy on Thursday.
Stephen Gallo, head of European FX strategy at BMO, said whether the BoE manages to persuade investors to dial back their bets on multiple rate hikes remains unclear after ramping up its message about inflation risks in the space of just a few weeks.
"Given the uncertainty regarding the inflation outlook, we would question how much weight rates and FX markets will place on the Bank's expectations for 2022 at this early stage," Gallo said.
(Writing by William Schomberg; Editing by Toby Chopra)