By Jonathan Cable
LONDON (Reuters) - Bank of England rate setters won't shock markets with any policy moves when they meet next week as a struggling economy and Brexit fears offset any concerns over inflation sailing well above target.
Britain's economy initially withstood the shock of last year's decision to quit the European Union but slowed sharply in early 2017 and is expected to grow by just 0.3 percent this quarter, half the rate of the euro zone. [ECILT/GB]
That poses a challenge for the central bank as, rather than targeting growth, its main remit is to keep inflation -- currently running at 2.6 percent -- at 2 percent.
"We expect the Bank of England to leave monetary policy unchanged, given the subdued growth story and ongoing Brexit uncertainty," said James Knightley at ING.
"Nonetheless, there are going to be members who continue to vote for a rate hike, given that consumer price inflation is likely to move higher once again."
At the last meeting two members of the Monetary Policy Committee voted to increase rock-bottom interest rates, but none of their seven colleagues are expected to join them on Thursday in calling for higher borrowing costs.
"Our own view is that rates won't rise this year or next. But that doesn't mean the rollercoaster ride for expectations is over," said Liz Martins at HSBC.
"An unexpectedly hawkish tilt from the MPC in September could mean a kneejerk reaction which pushes sterling and rates higher -- if only temporarily."
The risk of a "bumpy Brexit" does not mean the Bank should keep interest rates at their record low, MPC member Michael Saunders said last week, as the central bank risked being rushed into sharper rate hikes in future, potentially hurting growth.
Inflation broke through target earlier this year, largely because sterling's plunge in value since Britons voted to leave the European Union in June 2016 has pushed up import prices.
Policymakers at the European Central Bank are facing the opposite problem -- they are struggling to get inflation up to their 2 percent target ceiling as a strengthening euro has kept price rises in check.
They left their own ultra-easy monetary policy alone on Thursday but will decide next month how to proceed with the Bank's massive stimulus program in 2018.
ECB President Mario Draghi said the euro's exchange rate is "very important" and needs careful monitoring.
His cautious comments raise the chances the ECB will opt to phase out its 2.3 trillion euro bond buying scheme only very slowly next year, despite solid economic growth.
"The current economic conditions warrant a slightly less accommodative monetary policy in the near future, provided the euro or any other disturbing element do not derail the euro zone's recovery," said Louis Harreau at Credit Agricole.
In the United States, the Federal Reserve has already started on a tightening cycle but appears to be getting more dovish in the face of weak economic data.
Recent comments from Fed policymakers show a split on the outlook for inflation and how that will play out for future interest rate increases so August price data due on Thursday should give markets more of a steer.
The Swiss National Bank also meets on Thursday but is unlikely to move, with political tensions and low inflation keeping their hands tied.
Switzerland's franc is susceptible to appreciation during periods of increased geopolitical tension and the potential for conflict in the Korean peninsula will weigh on minds.
North Korea has stepped up the development of weapons in defiance of U.N. sanctions and tested several missiles this year, including one that flew over Japan. Pyongyang conducted its sixth and biggest nuclear test on Sept. 3.
A survey on Friday showed most South Koreans doubt North Korea will start a war, although President Donald Trump again highlighted the possibility of a U.S. military response.
(Editing by Catherine Evans)