U.S. elephant lurks in the room at the BoE

The Bank of England hit the public with a barrage of economic forecasts this week but made no mention of what may prove the biggest influence on when it starts to raise interest rates -- what the U.S. Federal Reserve does next.

The British central bank surprised some investors on Thursday by sounding relaxed about keeping rates at a record low 0.5 percent, where they have sat since the nadir of the financial crisis more than six years ago.

Only one of the BoE's nine policymakers voted for an immediate rate hike, the first split this year. Economists had expected more widespread dissent as rising wages point to future price pressure, even with inflation currently at zero.

Central to the lack of urgency on raising rates is the strength of sterling, which earlier this week touched its highest level in more than seven years against a basket of currencies=GBP.

The strong pound will push down import prices further and do part of the job that would usually fall to higher rates.

And a key factor for sterling will be the Fed's decision on when to raise U.S. interest rates, possibly as soon as next month.

This would allow Carney and the BoE to see exactly what happens to the world economy when the U.S. central bank starts tightening.

"The way the Bank of England puts out its rhetoric, they centre it around sterling. But in reality it has got more to do with the global economy's response to the start of the Fed's rate cycle," Mike Amey, head of the UK portfolio of global fund management firm Pimco, said.

"I would want to see how the economy responds to what would be the first rate hike in nine years out of the world's major central bank and then think about hiking rates myself."

BoE officials bristle at the suggestion that they are waiting to follow their U.S. peers.

The United States and Britain have broken away from the leading advanced economies in Europe and Asia which remain deep in stimulus plans to try to revive growth.

In both countries, unemployment has tumbled and U.S. payrolls data on Friday showed a rebound in wages after a surprise stall the month before, opening the door wider to a Fed interest rate hike in September.

David Miles, a member of the Bank's Monetary Policy Committee, said last month it was "a daft idea" to think the BoE could not raise rates before the Fed moved.

Yet a British rate hike before the Fed would push sterling up further, complicating the BoE's task of getting inflation back to its 2 percent target in two years and adding to exporters' worries about the pound's strength.

Morgan Stanley fixed income strategist Anthony O'Brien said sterling's exchange rate against the dollar and the price of British government bonds were currently particularly heavily influenced by market expectations for future Fed policy.

"The market expects (that) only by waiting until after the Fed tightens policy will the expected depreciation in sterling allow the MPC to lift off," O'Brien said.

Most economists expect a rate rise around February. But economists at UBS said a September hike in the United States and fresh signs of strength in Britain's labour market could revive expectations of a BoE move in November.

"The market is currently pricing the first hike in May next

year. We continue to consider the risk of an earlier hike to be underpriced," the UBS analysts said in an email to clients. "Keep an eye on the Fed for insights into just how underpriced this possibility is."



(Additional reporting by David Milliken; Editing by Ruth Pitchford)