Bank of England to hold rates, show patience with war-driven inflation: Reuters poll

LONDON, Sept 8 (Reuters) - The Bank of England will hold Bank Rate at 3.75% for the rest of the year and through at least mid-2027, according to a Reuters poll of economists who still judge inflation is not strong enough for a majority of policymakers to vote for higher borrowing costs.

Higher energy prices stemming from the ongoing U.S.-Israeli war on Iran may have further delayed any prospect of a cut in UK interest rates until late next year, economists say. Meanwhile, financial markets are pricing three rate hikes through the middle of 2027, starting in November.

Brent crude oil futures are again approaching $100 a barrel as the conflict continues but so far there has been no evidence of higher energy costs filtering through to inflation in the wider economy, which is growing at a steady but modest pace.

"For the Bank, there are no flashing warning signs," said Gabriella Willis, UK economist at Santander CIB.

A sharp rise in global bond yields in recent weeks has tightened overall financial conditions and threatens to further drive up mortgage rates. That also gives policymakers more room to watch how the economy performs over coming months.

All 65 economists polled by Reuters September 4 to 8 said they expect the Monetary Policy Committee to leave rates on hold on September 17.

Nearly 90% of economists polled, 57 of 65, expect rates to remain on hold for the rest of the year, the same proportion as in a survey taken three weeks ago. Eight expect a rate rise to 4.00% by end-year.

Since the war began in late February, there has been a consistent majority of BoE watchers expecting no interest rate rise this year. But their conviction has increased in recent months.

Three of nine MPC members voted for a rate rise at the July meeting, up from two previously, a vote split likely to remain the same at this month's meeting.

That underscores upside risks to rates in the run-up to an expected peak in inflation, which the BoE targets at 2%, later this year. Inflation was last reported at 2.9%.

"They said they would consider a move if evidence of 'second-round effects' started to appear, and, so far, that's not the case," Elizabeth Martins, UK economist at HSBC, wrote in a note.

"There is one more inflation and labour market release before the September decision, but as things stand now, we don't think conditions have been met for the holders to change their votes at this meeting."

The MPC's next move will be a quarter-point cut in the third quarter of 2027, according to the median forecast, later than predicted in the August poll.

James Moberly, senior UK economist at Goldman Sachs, reckons inflation will peak at 3.3% in November, higher than the BoE's own projection, but still not likely to trigger worries about second-round effects. He then expects inflation to fall faster than the BoE does.

"Given this outlook, we continue to think that market pricing for Bank Rate... looks too high. We instead expect the MPC to hold this year before cutting in 2027."

There were very few changes to overall economic forecasts in the latest poll compared with the August poll.

Inflation was expected to average 3.1% this year before dropping to 2.5% in 2027 and 1.9% in 2028.

Economic growth will average 1.1% and 1.2% in 2026 and 2027, respectively, before accelerating to 1.5% in 2028, according to the latest survey.

(Other stories from the Reuters global economic poll)

(Writing by Ross Finley; Additional reporting by Nushaba Iqbal; Polling and data analysis by Anant Chandak and Jaiganesh Mahesh; Editing by Catherine Evans)